Optimal Consumption-Investment Decisions Allowing for Bankruptcy: A Survey
University of Texas at Dallas - Naveen Jindal School of Management
January 14, 2009
WORLDWIDE ASSET AND LIABILITY MODELING, W.T. Ziemba, J.M. Mulvey, eds., pp. 387-426, Cambridge University Press, Cambridge, U.K., 1998
This paper surveys the research on optimal consumption and investment problem of an agent who is subject to bankruptcy that has a specified utility (reward or penalty). The bankruptcy utility, modeled by a parameter, may be the result of welfare subsidies, the agent's innnate ability to recover from bankruptcy, psychic costs associated with bankruptcy, etc. Modeled with non-negative consumption, positive subsistence consumption, risky assets modeled by geometric Brwonian motions or semimartingales are discussed. The paper concludes with suggestions for open research problems.
Number of Pages in PDF File: 39
Keywords: Consumption and Investment problem, Portfolio and Consumption problem, bankruptcy, subsistence consumption, minimal consumption, borrowing constraints, stochastic optimal control, martingale problems, optimal stopping problems, Risk aversion measures, Open Research Problems, financial engineering
JEL Classification: C61, D11, D60, D81, G11, G33, G12, H31Accepted Paper Series
Date posted: January 16, 2009 ; Last revised: March 6, 2009
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