Abstract
In this paper, we investigate the optimal consumption and portfolio selection problem with negative wealth constraints for an economic agent who has a quadratic utility function of consumption and receives a constant labor income. Due to the property of the quadratic utility function, we separate our problem into two cases and derive the closed-form solutions for each case. We also illustrate some numerical implications of the optimal consumption and portfolio.
Highlights
1 Introduction We provide an optimal consumption and portfolio decision with negative wealth constraints for an economic agent who has a quadratic utility function of consumption
We derive an analytic solution with the negative wealth constraint
We check some properties of optimal consumption and portfolio with a constant labor income
Summary
1 Introduction We provide an optimal consumption and portfolio decision with negative wealth constraints for an economic agent who has a quadratic utility function of consumption. A bliss level of consumption is an import feature of the quadratic utility. It means that an agent’s risk taking becomes zero at a wealth level for some bliss point of consumption. We check some properties of optimal consumption and portfolio with a constant labor income.
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