A Forward-Solving Numerical Technique for Dynamic Consumption and Portfolio Allocation Problems

44 Pages Posted: 18 Mar 2005

See all articles by George Chacko

George Chacko

Santa Clara University - Finance Department

Maxim Golts

Acadian Asset Management

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Vladimir Novakovsky

Harvard University

Date Written: March 15, 2005

Abstract

This paper develops a simple approach to solving multi-period consumption and investment problems. All numerical methods in use for these types of problems work by solving the problem backward, i.e., solving the consumption and investment decision at the end of the investment horizon and working backward. For certain problems, such as economies with capital gains taxes, a backward approach is extremely unwieldy. For this reason, this paper develops a forward-solving approach that is based on Monte Carlo simulations. We demonstrate that the methodology in this paper is extremely effective at solving the tax problem and other unwieldy problems. In addition, the methodology works perfectly well with problems that have traditionally used a backward-solving approach.

Keywords: Numerical, Consumption, Portfolio Choice, Asset Allocation

JEL Classification: G11, G12

Suggested Citation

Chacko, George and Golts, Maxim and Desai, Mihir A. and Novakovsky, Vladimir, A Forward-Solving Numerical Technique for Dynamic Consumption and Portfolio Allocation Problems (March 15, 2005). Available at SSRN: https://ssrn.com/abstract=687622 or http://dx.doi.org/10.2139/ssrn.687622

George Chacko (Contact Author)

Santa Clara University - Finance Department ( email )

Santa Clara, CA 95053
United States

Maxim Golts

Acadian Asset Management ( email )

260 Franklin Street
Boston, MA 02110
United States

Mihir A. Desai

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vladimir Novakovsky

Harvard University ( email )

Cambridge, MA 02138
United States

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