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Role of index bonds in an optimal dynamic asset allocation model with real subsistence consumption

Gong, Ning and Li, Tao 2006, Role of index bonds in an optimal dynamic asset allocation model with real subsistence consumption, Applied mathematics and computation, vol. 174, no. 1, pp. 710-731, doi: 10.1016/j.amc.2005.04.089.

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Title Role of index bonds in an optimal dynamic asset allocation model with real subsistence consumption
Author(s) Gong, Ning
Li, Tao
Journal name Applied mathematics and computation
Volume number 174
Issue number 1
Start page 710
End page 731
Total pages 22
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2006-03
ISSN 0096-3003
Summary We investigate the role of index bonds in a dynamic consumption and asset allocation model where the rate of real consumption at any given time cannot fall below a fixed level. An explicit form of the optimal consumption and portfolio rule for a class of Constant Relative Risk Aversion (CRRA) utility functions is derived. Consumption increases above the subsistence level only when wealth exceeds a threshold value. Risky investments in equity and nominal bonds are initially proportional to the excess of wealth over a lower bound, and then increase nonlinearly with wealth. The desirability of investing in the risky assets are related to the agent’s risk preference, the equity premium, and the inflation risk premium. The demand for index bonds is also obtained. The results should be useful for the management of defined benefit pension funds, university endowments, and other portfolios which have a withdrawal pre-commitment in real terms.
Language eng
DOI 10.1016/j.amc.2005.04.089
Field of Research 150205 Investment and Risk Management
0102 Applied Mathematics
0103 Numerical And Computational Mathematics
Socio Economic Objective 910102 Demography
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2005, Elseiver
Persistent URL http://hdl.handle.net/10536/DRO/DU:30088522

Document type: Journal Article
Collection: Department of Finance
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