Optimal Consumption Choices for a 'Large' Investor
Rodney L. White Center for Financial Research Working Paper Series #04-96
Posted: 21 May 1998
Date Written: March 1996
This paper examines the optimal consumption and investment problem for a "large" investor, whose portfolio choices affect the instantaneous expected returns on the traded assets. Alternatively, our analysis can be interpreted in terms of an optimal growth problem with nonlinear technologies. Existence of optimal policies is established using martingale and duality techniques under general assumptions on the securities' price process and the investor's preferences. As an illustration of our characterization result, explicit solutions are provided for specific examples involving an agent with logarithmic utilities, and a generalized two-factor version of the CCAPM is derived. The analogy of the consumption problem examined in this paper to the consumption problem with constraints on the portfolio choices is emphasized.
JEL Classification: G11, G12, D92, C61
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