A0323
Title: Optimal consumption and investment with independent stochastic labor income
Authors: Seyoung Park - University of Nottingham (United Kingdom) [presenting]
Alain Bensoussan - University of Texas at Dallas (United States)
Abstract: The aim is to develop a new dynamic continuous-time model of optimal consumption and investment to include independent stochastic labor income. We reduce the problem of solving the Bellman equation to the problem of solving an integral equation. We then explicitly characterize the optimal consumption and investment strategy as a function of the income-to-wealth ratio. We provide some analytical comparative statics associated with the value function and optimal strategies. We also develop a quite general numerical algorithm for control iteration and solve the Bellman equation as a sequence of solutions to ordinary differential equations. This numerical algorithm can be readily applied to many other optimal consumption and investment problems, especially with extra nondiversifiable Brownian risks, resulting in nonlinear Bellman equations. Finally, our numerical analysis illustrates how the presence of stochastic labor income affects the optimal consumption and investment strategy.
