2021 article
Optimal asset allocation with restrictions on liquidity
Medhin, N., & Xu, C. (2021, July 24). STOCHASTIC ANALYSIS AND APPLICATIONS.
author keywords: Optimal asset allocation; liquidity; hyperbolic absolute risk aversion utility function; Hamilton-Jacobi-Bellman equation
UN Sustainable Development Goal Categories
8. Decent Work and Economic Growth
(Web of Science)
Source: Web Of Science
Added: August 30, 2021
Abstract An optimal asset allocation problem involving restrictions on liquidity is studied in this article. The portfolio consists of liquid and illiquid asset. The portfolio is only allowed to rebalance at particular times. An investor tries to maximize the total utility of a hyperbolic absolute risk aversion function depending on the consumption, which is sourced only from the liquid asset. The optimal policies of the consumption, investment, and allocation are derived. A numerical approximation scheme is developed to show the optimal allocation policy in our model is path-dependent. Paths of the value function and other optimal controls are illustrated to validate our results.