Investment and Consumption with Forward Criteria and Black's Inverse Investment Problem

31 Pages Posted: 13 May 2016

Date Written: May 12, 2016

Abstract

We consider the problem of optimal portfolio selection using forward investment and consumption criteria. Such criteria were introduced in and allow the investor to consider utility from both investment and consumption also when investing over unspecified or infinite horizons. Our focus is on criteria which satisfy a specific dynamic property in that their volatility component is identically zero. We provide an explicit characterization of those criteria and explicit formulae for the associated optimal investment and consumption strategies. We further show that an important class of criteria may be decomposed into a combination of pure forward investment and infinite horizon Merton criteria. Our second contribution is that we provide the solution to a specific inverse investment problem proposed by Black. While this result is of independent interest, it also allows us to obtain further results on the adaptedness of non-volatile forward criteria, and provides key insights on the relation between the notion of forward criteria and this inverse investment problem.

Keywords: Optimal Investment and Consumption, Forward Criteria, Black's Investment Problem, Inverse Investment Problems, Dynamic Consistency, Stochastic Utility Functions, Progressive Utilities, in Finite Horizon Merton Criteria

JEL Classification: D81, G11

Suggested Citation

Källblad, Sigrid, Investment and Consumption with Forward Criteria and Black's Inverse Investment Problem (May 12, 2016). Available at SSRN: https://ssrn.com/abstract=2779188 or http://dx.doi.org/10.2139/ssrn.2779188

Sigrid Källblad (Contact Author)

Vienna University of Technology ( email )

Karlsplatz 13
Vienna
Austria

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