Abstract
In dynamic optimal consumption–investment problems one typically aims to find an optimal control from the set of adapted processes. This is also the natural starting point in case of a mean-variance objective. In contrast, we solve the optimization problem with the special feature that the consumption rate and the investment proportion are constrained to be deterministic processes. As a result we get rid of a series of unwanted features of the stochastic solution including diffusive consumption, satisfaction points and consistency problems. Deterministic strategies typically appear in unit-linked life insurance contracts, where the life-cycle investment strategy is age dependent but wealth independent. We explain how optimal deterministic strategies can be found numerically and present an example from life insurance where we compare the optimal solution with suboptimal deterministic strategies derived from the stochastic solution.
| Original language | English |
|---|---|
| Journal | Stochastics: An International Journal of Probability and Stochastic Processes |
| Volume | 85 |
| Issue number | 4 |
| Pages (from-to) | 620-636 |
| ISSN | 1744-2508 |
| DOIs | |
| Publication status | Published - 2013 |