A Computational Scheme for the Optimal Strategy in an Incomplete Market
Posted: 28 Mar 2007
There are 2 versions of this paper
A Computational Scheme for the Optimal Strategy in an Incomplete Market
Abstract
We examine the optimal portfolio selection problem of a single agent who receives an unhedgeable endowment. The agent wishes to optimize his/her log-utility derived from his/her terminal wealth. We do not solve this problem analytically but construct a recursive computational algorithm which approximates the optimal one. We present an "intelligent" initial portfolio which requires, numerically, about 25% fewer corrective steps in the algorithm than a random initial portfolio, and outperforms the portfolio which ignores the unhedgeable risk of the endowment.
Keywords: Utility maximization, incomplete markets, endowment uncertainty
JEL Classification: D52, G11
Suggested Citation: Suggested Citation