Deakin University
Browse

File(s) under permanent embargo

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

journal contribution
posted on 2006-03-01, 00:00 authored by Ning GongNing Gong, T Li
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.

History

Journal

Applied mathematics and computation

Volume

174

Issue

1

Pagination

710 - 731

Publisher

Elsevier

Location

Amsterdam, The Netherlands

ISSN

0096-3003

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal; C Journal article

Copyright notice

2005, Elseiver

Usage metrics

    Research Publications

    Exports

    RefWorks
    BibTeX
    Ref. manager
    Endnote
    DataCite
    NLM
    DC