Optimal Consumption Choices for a 'Large' Investor

Rodney L. White Center for Financial Research Working Paper Series #04-96

Posted: 21 May 1998

See all articles by Domenico Cuoco

Domenico Cuoco

University of Pennsylvania - Finance Department

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: March 1996

Abstract

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

Suggested Citation

Cuoco, Domenico and Cvitanic, Jaksa, Optimal Consumption Choices for a 'Large' Investor (March 1996 ). Rodney L. White Center for Financial Research Working Paper Series #04-96. Available at SSRN: https://ssrn.com/abstract=7436

Domenico Cuoco (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~cvitanic/

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