Search Results (75)

We study an infinite-horizon consumption, portfolio, and early-retirement problem for a wage earner who receives labor income while working but bears a constant utility cost of labor. Retirement is irreversible and removes both labor income and work disutility. In addition, retirement is feasible only after the agent has accumulated a prescribed level of financial wealth. We solve the problem under constant relative risk aversion using a dual martingale method. The post-retirement problem reduces to the standard Merton problem, while the pre-retirement problem becomes an optimal stopping problem with a target-induced obstacle. We derive an explicit dual value function, characterize the free boundary, recover the primal value, and obtain closed-form consumption, portfolio, and retirement policies. The solution exhibits a sharp slack–binding dichotomy: small targets do not affect the classical disutility retirement policy, whereas large targets become the effective retirement threshold and reshape both consumption and risky investment before retirement. Full article

This paper investigates a stochastic differential portfolio game between two competing investors with relative wealth preferences. The financial market consists of one risk-free asset and one risky asset, whose price dynamics follow the CEV model. We formulate this game as two utility maximization problems, where each investor aims to maximize their relative utility defined as the weighted average of the ratio between their terminal wealth and the competitor’s terminal wealth. Firstly, we derive the Hamilton–Jacobi–Bellman (HJB) equations and corresponding value functions through the dynamic programming principle. Next, we obtain the explicit solutions to equilibrium investment strategies and value functions for the non-zero-sum game under the CRRA utility framework. Finally, we conducted numerical simulations to analyze the impacts of model parameters on equilibrium strategies and provide relevant economic explanations. Full article

This paper studies an optimal consumption–investment problem in a multi-asset financial market where risky assets returns incorporate returns history. Preferences are modelled using Epstein–Zin recursive utility, allowing a separation between risk aversion and intertemporal substitution. Using the well-known martingale optimality principle and forward–backward stochastic differential equations (FBSDEs), we obtain explicit closed-form solutions for the optimal strategy and value function. A sensitivity analysis illustrates the dependence of optimal policies and value function on key parameters, including risk aversion, elasticity of intertemporal substitution (EIS), memory horizon, learning intensity, and wealth-history parameters. The findings provide new insights into the interaction between behavioural features and dynamic portfolio choice in a multi-asset setting. Full article

This study assesses liquidity, profitability, and working capital management (WCM) strategy in Polish manufacturing companies in the pressure-casting industry, drawing on evidence from the pre-COVID-19, COVID-19, and Russia–Ukraine war periods. Using panel data from 19 companies representing 90% of the Polish aluminum diecasting industry, we employ non-parametric tests (Mann–Whitney U and Kruskal–Wallis) to analyze the data. The period after the COVID-19 crisis coincides with the Russian–Ukrainian war. These countries are Poland’s neighbors. This period of uncertainty for Poland has led to supply chain disruptions and reduced investments. For manufacturing companies, this is dangerous because they have limited development opportunities. The results indicate the adoption of a conservative WCM strategy in Polish aluminum foundries during the pre-COVID-19, COVID-19, and Russia–Ukraine war periods, characterized by increased inventory levels, extended operating cycles in large firms. Additionally, the results showed reduced the level of receivables in large companies and visible decrease in the level of financial liquidity and profitability—however, these differences are not statistically significant. Polish aluminum foundries are adapting their WCM strategies toward an optimal, conservative approach that incorporates both safe and risky elements to ensure continued operations and profits. In addition, larger Polish aluminum foundries exhibit distinct liquidity patterns relative to smaller foundries, particularly in indicators of inventory, receivables, and fixed assets. In addition, the Russia–Ukraine war period exhibits distinct liquidity characteristics in Polish aluminum foundries compared with the COVID-19 and pre-COVID-19 periods, particularly in inventory turnover and operating cycle. The results of this study offer several novel contributions to the existing literature on financial security indicators by examining unexplored factors related to size and period. The results of this study have several practical implications for business leaders seeking to adopt an optimal liquidity, profitability, and WCM strategy. Full article

Investment in risky financial assets plays a crucial role in individual wealth accumulation and broader financial market development. However, existing research has primarily emphasized financial literacy while giving limited attention to behavioral mechanisms that may weaken its influence on investment behavior. In particular, hyperbolic discounting, reflecting time-inconsistent preferences that favor immediate rewards over long-term gains, may constrain the effective translation of financial knowledge into forward-looking financial decisions. Against this background, this study examines whether hyperbolic discounting mediates the association between financial literacy and investment in risky assets using large-scale survey data from Japan’s Money and Life survey. Employing regression-based mediation analysis within a cross-sectional framework, the results indicate that financial literacy is strongly and positively associated with risky asset investment, while hyperbolic discounting exerts a statistically significant but economically small mediating effect that slightly attenuates this relationship. The findings suggest that cognitive financial capability remains the dominant driver of participation in risky financial markets, whereas present-biased preferences play a secondary behavioral role. These results provide important implications for investors, educators, and policymakers by highlighting that policies aimed at improving financial literacy are likely to yield substantial investment benefits, while complementary interventions addressing behavioral biases may offer additional, though more modest, gains in promoting long-term, forward-looking financial decision-making. Full article

This paper investigates the optimal investment and reinsurance problem for insurers in a financial market with contagion risk. The prices of risky assets are assumed to follow a jump–diffusion model, where the jump component is driven by a multidimensional dynamic contagion process with diffusion (DCPD). This process simultaneously captures jumps triggered by endogenous and exogenous excitations, effectively characterizing the dynamic contagion effects arising from the joint influence of multiple factors in financial markets. The insurer aims to maximize a mean-variance (MV) utility function by purchasing per-loss reinsurance and investing the surplus in the contagion financial market. By solving the extended Hamilton–Jacobi–Bellman (HJB) equations, we derive the time-consistent equilibrium investment and reinsurance strategies, as well as explicit expressions for the equilibrium value function. These results are characterized by two nonlocal partial differential equations (PDEs), whose probabilistic solutions are obtained through the Feynman–Kac formula. Finally, numerical experiments illustrate how equilibrium strategies respond to changes in contagion intensity and confirm the effectiveness of the proposed model. Full article

This paper examines an optimal investment–consumption problem in a setting where the financial environment is influenced by both stochastic factors and delayed effects. The investor, endowed with Constant Relative Risk Aversion (CRRA) preferences, allocates wealth between a risk-free asset and a single risky asset. The short rate follows a Vas$\check{\mathrm{i}}$ček-type term structure model, while the risky asset price dynamics are driven by a delayed Heston specification whose variance process evolves according to a Cox–Ingersoll–Ross (CIR) diffusion. Delayed dependence in the wealth dynamics is incorporated through two auxiliary variables that summarize past wealth trajectories, enabling us to recast the naturally infinite-dimensional delay problem into a finite-dimensional Markovian framework. Using Bellman’s dynamic programming principle, we derive the associated Hamilton–Jacobi–Bellman (HJB) partial differential equation and demonstrate that it generalizes the classical Merton formulation to simultaneously accommodate delay, stochastic interest rates, stochastic volatility, and consumption. Under CRRA utility, we obtain closed-form expressions for the value function and the optimal feedback controls. Numerical illustrations highlight how delay and market parameters impact optimal portfolio allocation and consumption policies. Full article

The acceleration of financial innovation and pro-crypto regulations in the digital asset space have spurred interest in cryptocurrencies among funds, and institutional and retail investors. Like any risky assets, investment in digital assets offers opportunities in terms of returns and challenges in terms of risk. However, unlike traditional assets, digital assets like cryptocurrencies are highly volatile. Accordingly, applying conventional single-criterion financial metrics for portfolio construction may not be sufficient as the method falls short in capturing the complex, multidimensional risk-return dynamics of innovative financial assets like cryptocurrencies. To address this gap, this study introduces a novel, integrated hybrid Multi-Criteria Decision-Making (MCDM) framework that provides a structured, transparent, and robust approach to cryptocurrency fund selection. The framework seamlessly integrates three well-established operations research methodologies: the Decision-Making Trial and Evaluation Laboratory (DEMATEL), the Analytic Network Process (ANP), and the Vlse Kriterijumsk Optimizacija I Kompromisno Resenje (VIKOR) algorithm. DEMATEL is utilized to map and analyze the intricate causal interdependencies among a comprehensive set of evaluation criteria, categorizing them into foundational “cause” factors and resultant “effect” factors. This causal structure informs the ANP model, which computes precise criterion weights while accounting for complex feedback and dependency relationships. Subsequently, the VIKOR algorithm is invoked to use these weights to rank cryptocurrency fund alternatives, delivering a compromise between optimizing group utility and minimizing individual regret. To illustrate the application and efficacy of the proposed method, a diverse set of 20 cryptocurrency funds is analyzed. From the analysis, it is shown that foundational criteria, such as “Fee (%)” and “Annualized Standard Deviation,” are the primary causal drivers of financial performance outcomes of funds. This proposed framework supports strategic capital allocation in a rapidly evolving domains of digital finance. Full article

This study takes the limited household participation in risky financial markets as its point of departure. Drawing on microdata from the 2019 China Household Finance Survey (CHFS), we construct a multidimensional analytical framework using machine learning methods. The results indicate that this limitation arises from the interplay of multiple dimensions, with significant nonlinear relationships observed between these factors and household investment behavior. Insufficient development of key driving factors constitutes the main barrier to participation in risky financial markets. Feature interaction analysis reveals a “reversal effect” in how urban–rural disparities, economic attention, income level, and social engagement shape participation behavior. Educational attainment and financial literacy act as “threshold conditions” that enable economic attention to translate into actual investment decisions. The heterogeneity analysis further shows that households at different life-cycle stages as well as across urban–rural settings exhibit distinct participation patterns. These findings provide data-driven insights that can inform policies to promote financial inclusion, enhance investor education, and strengthen household risk management practices. Full article

This paper investigates an infinite-horizon optimal consumption and investment problem for an agent who consumes two types of goods: necessities and luxuries. The agent derives utility from both goods but faces a ratcheting constraint on luxury consumption, which prohibits any decline in its level over time. This constraint captures the irreversible nature of high living standards or luxury habits often observed in real economies. We formulate the problem in a complete financial market with a risk-free asset and a risky stock and solve it analytically using the dual–martingale method. The dual problem is shown to reduce to a family of optimal stopping problems, from which we derive explicit closed-form solutions for the value function and optimal policies. Our results reveal that the ratcheting constraint generates asymmetric consumption dynamics: necessities adjust freely, whereas luxuries exhibit downward rigidity. As a consequence, the marginal propensity to consume necessities declines with wealth, while luxury consumption and portfolio risk exposure increase more sharply compared to the benchmark case without ratcheting. The model provides a continuous-time microfoundation for persistent high consumption levels and greater risk-taking among wealthy individuals. Full article

This paper investigates a robust optimal reinsurance and investment problem for an insurance company operating in a Markov-modulated financial market. The insurer’s surplus process is modeled by a diffusion process with jumps, which is correlated with financial risky assets through a common shock structure. The economic regime switches according to a continuous-time Markov chain. To address model uncertainty concerning both diffusion and jump components, we formulate the problem within a robust optimal control framework. By applying the Girsanov theorem for semimartingales, we derive the dynamics of the wealth process under an equivalent martingale measure. We then establish the associated Hamilton–Jacobi–Bellman (HJB) equation, which constitutes a coupled system of nonlinear second-order integro-differential equations. An explicit form of the relative entropy penalty function is provided to quantify the cost of deviating from the reference model. The theoretical results furnish a foundation for numerical solutions using actor–critic reinforcement learning algorithms. Full article

We study a finite-horizon optimal job-switching and portfolio allocation problem where an agent faces a mandatory retirement date. The agent can freely switch between two jobs with differing levels of income and leisure. The financial market consists of a risk-free asset and a risky asset, with the agent making dynamic consumption, investment, and job-switching decisions to maximize lifetime utility. The utility function follows a Cobb–Douglas form, incorporating both consumption and leisure preferences. Using a dual-martingale approach, we derive the optimal policies and establish a verification theorem confirming their optimality. Our results provide insights into the trade-offs between labor income and leisure over a finite career horizon and their implications for retirement planning and investment behavior. Full article

Investors face the challenge of how to incorporate economic and financial forecasts into their investment strategy, especially in times of financial crisis. To model this situation, we consider a financial market consisting of a risk-free asset with a constant interest rate as well as a risky asset whose drift and volatility is influenced by a stochastic process indicating the probability of potential market downturns. We use a dynamic portfolio optimization approach in continuous time to maximize the expected utility of terminal wealth and solve the corresponding HJB equations for the general class of HARA utility functions. The resulting optimal strategy can be obtained in closed form. It corresponds to a CPPI strategy with a stochastic multiplier that depends on the information from the crisis indicator. In addition to the theoretical results, a performance analysis of the derived strategy is implemented. The specified model is fitted using historic market data and the performance is compared to the optimal portfolio strategy obtained in a Black–Scholes framework without crisis information. The new strategy clearly dominates the BS-based CPPI strategy with respect to the Sharpe Ratio and Adjusted Sharpe Ratio. Full article

Accepting a certain degree of investment loss risk is essential for long-term portfolio management. However, overconfidence bias within financial literacy can prompt excessively risky behavior and amplify susceptibility to other cognitive biases. These tendencies can undermine investment loss tolerance beyond the baseline level shaped by sociodemographic, economic, psychological, and cultural factors. This study empirically examines the association between overconfidence and investment loss tolerance, which is measured by the point at which respondents indicate they would sell their investments in a hypothetical loss scenario. Using a large-scale dataset of 161,765 active investors from one of Japan’s largest online securities firms, we conduct ordered probit and ordered logit regression analyses, controlling for a range of sociodemographic, economic, and psychological variables. Our findings reveal that overconfidence is statistically significantly and negatively associated with investment loss tolerance, indicating that overconfident investors are more prone to prematurely liquidating assets during market downturns. This behavior reflects an impulse to avoid even modest losses. The findings suggest several possible practical strategies to mitigate the detrimental effects of overconfidence on long-term investment behavior. Full article

This research investigates the liability management of Thai life insurers in a prolonged low-interest rate environment. It examines the impact of interest rate changes on life insurance products, solvency, and profitability. The study identifies a significant shift in product portfolios toward non-interest-sensitive products, which helps mitigate financial risk and enhance solvency. The solvency of Thai life insurers is influenced by their return on assets, with higher risk exposures requiring more capital, potentially lowering solvency levels. However, the proportion of risky investment assets is not significantly related to the solvency position in the Thai market. The market index return is a significant predictor of stock returns for Thai life insurers, while changes in interest rate sensitivity are not statistically significant between low-rate and normal periods. The average solvency level under Thailand’s regulatory regime is also not statistically different between normal and prolonged low-interest rate situations. This study contributes to the understanding of liability management practices among life insurers in Thailand and provides insights into the challenges and strategies for maintaining solvency and profitability in a low-interest rate environment. Full article