Using the Hamilton-Jacobi-Bellman equation, we derive both a Keynes-Ramsey rule and a closed form solution for an optimal consumption-investment problem with labor income. The utility function is unbounded and uncertainty stems from a Poisson process. Our results can be derived because of the...

If a given risky prospect is compared with multiple choice alternatives, then a joint test for optimality is more appropriate than a series of pairwise Stochastic Dominance tests. We develop and implement a bootstrap empirical likelihood ratio test for this hypothesis. The test statistic and...

Dynamic programming is the essential tool in dynamic economic analysis. Problems such as portfolio allocation for individuals and optimal economic growth are typical examples. Numerical methods typically approximate the value function. Recent work has focused on making numerical methods more...

We study a dynamic portfolio selection problem in which an agent trades a stock and a risk-free asset with the objective of maximizing the rank-dependent utility of her wealth at the terminal time of the investment horizon. Due to time inconsistency, we consider three types of agents,...

We test whether probability weighting affects household portfolio choice in a representative survey. On average, people display inverse-S shaped probability weighting, overweighting low probability events. As theory predicts, probability weighting is positively associated with portfolio...

This interdisciplinary paper explains how mathematical techniques of stochastic optimal control can be applied to the recent subprime mortgage crisis. Why did the financial markets fail to anticipate the recent debt crisis, despite the large literature in mathematical finance concerning optimal...

The two fund separation property of the elliptical distributions is extended to the skew-elliptical and by adding a number of funds equalling the rank of the skewness matrix. Some elements of the generalization to singular extended skew-elliptical distributions are covered. -- Portfolio...

We propose a simplified approach to mean-variance portfolio problems by changing their parametrisation from trading strategies to final positions. This allows us to treat, under a very mild no-arbitrage-type assumption, a whole range of quadratic optimisation problems by simple mathematical...

This study develops and implements a theory and method for analyzing whether introducing new securities or relaxing investment constraints improves the investment opportunity set for risk averse investors. We develop a test procedure for ‘stochastic spanning’ for two nested polyhedral...