164. Stochastic Income and Optimal Policies: A New Analysis
Invited abstract in session WD-54: Stochastic Models and Optimal Control , stream Stochastic modelling.
Wednesday, 14:30-16:00Room: Liberty 1.08
Authors (first author is the speaker)
| 1. | Seyoung Park
|
| Business School, University of Nottingham | |
| 2. | Alain Bensoussan
|
| School of Management, University of Texas at Dallas | |
| 3. | Adannah Duruoha
|
| Department of Mathematics, University of Texas at Dallas | |
| 4. | Viswanath Ramakrishna
|
| Department of Mathematics, University of Texas at Dallas |
Abstract
This paper provides a new analysis for optimal consumption and investment policies with stochastic income. Our analysis gives some kind of procedure for solving the Bellman equation with the dimension reduction scheme developed. In particular, we provide an interpretation of the reduced problem based on the probabilistic approach. The value funciton and optimal strategies are all explicitly characterized with analytic comparative statics provided, which is helpful to understand much of the economics in the paper. We also develop with the convergence theorem a numerical algorithm for policy iteration and solve the Bellman equation as a sequence of solutions to ordinary differential equations. Finally, the decision to invest more or fewer equity in the stock market in the presence of stochastic income is influenced, to a large extent, by the way in which how high risk aversion and income-to-wealth ratio are exhibited.
Keywords
- Stochastic Models
- Financial Modelling
- Control Theory
Status: accepted
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