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Optimal Consumption-Investment Decisions Allowing for Bankruptcy: A Survey

WORLDWIDE ASSET AND LIABILITY MODELING, W.T. Ziemba, J.M. Mulvey, eds., pp. 387-426, Cambridge University Press, Cambridge, U.K., 1998

39 Pages Posted: 16 Jan 2009 Last revised: 27 Mar 2014

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: January 14, 2009

Abstract

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.

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, H31

Suggested Citation

Sethi, Suresh, Optimal Consumption-Investment Decisions Allowing for Bankruptcy: A Survey (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 . Available at SSRN: https://ssrn.com/abstract=1327996

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

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