How to Manage Inflation Risk in an Asset Allocation Problem : an Algebric Aproximated Solution

This paper analyses the portfolio problem of an invetsor who wants to maximize the expected utility of his terminal real wealth in an incomplete financial market. The investor must cope with a set of stochastic investment opportunities and inflation risk following a jump-diffusion process. We investigate how the inflation risk affects the optimal portfolio composition and, at this aim, we present an approximated analytical solution to the portfolio choice problem based on the Feynman-Kac representation theorem. Finally, we compare our approximate solution with some exact solutions available in the literature and we find that the main qualitative results are maintained.asset allocation; inflation risk; Feynan-kac theorem; stochastic investment opportunities

How the Financial Managers’ Remuneration Can Affect the Optimal Portfolio Composition ?

In this paper we analyse the problem of an investor who must decide whether to manage his wealth by himself or give it in outsourcing. Financial managers are supposed to charge a commission composed of a fixed (A) and a variable (x) part, both deducted from portfolio payoffs. We demonstrate that the optimal portfolio composition crucially depends on the magnitude of A and x. We make a general analysis of this dependence and, in particular, we show that high level of A (respectively, x) lead to an outsourced portfolio which has a lower (respectively, higher) risk-return profile with respect to the self-managed portfolio.optimal portfolio;outsourcing; managers’remuneration

Investment Strategies for HARA Utility Function : A General Algebraic Approximated Solution

In an incomplete financial market where an investor maximizes the expected HARA utility of his terminal real wealth, we present an algebraic approximated solution for the optimal portfolio composition. We take into account : (i) a (finite) set of assets, (ii) a (finite) set of state variables and (iii) a consumption price process, all of them described by general Ito processes; Finally, we supply an easy test for checking the goodness of the approximated result.Incomplete Market; Inflation Risk; Hamilton-Jacobi-Bellman equation; HARA utility function

Investment Strategies in Incomplete Markets : Sufficient Conditions for a Closed Form Solution

This paper analyses the portfolio problem of an investor who wants to maximize the expected power utility of his terminal wealth both in a complete and an incomplete financial market. We derive sufficient conditions for having a closed form solution. These conditions must hold on a suitable combination of the drift and diffusion coefficients of the stochastic processes describing the state variables and the asset prices. In particular, we show that our framework leads to two cases : (i) the case solvable thorough a log-linear value fucntion, and (ii) the case solvable thorough a log quadratie value function.Optimal portfolio choice, Incomplete market, Hamilton-Jacobi-Bellman equation

Optimal Real Consumption and Asset Allocation for a HARA Investor with Labour Income

In this paper, we take into account a very general setting with : (i) a set of stochastic investment opportunities, (ii) a set of risky assets, (iii) a riskless asset paying a stochastic interest rate, (iv) a stochastic inflation risk, (v) stochastic labor income , and (vi) HARA preferences. We compute a quasi-explicit solution for both the optimal consumption and asset allocation. This solution is based on two changes in the probability measure. We also show that the investor behaves as if he could rely on his wealth augmented by the expected value of all his “forward real labor incomes”Asset Allocation; Inflation risk; Stochastic labour income; Stochastic investment opportunities; Feynman-Kac theorem

Merit goods provision and optimal tax evasion

In a recent article Davidson, Lawrence and Wilson propose a model showing that, in the presence of distortionary taxation and goods of different quality, tax evasion can be an optimal device. Here, we show that this result, although quite interesting, cannot be generalised to a framework where Government activity consists of supplying merit goods and levying taxes to finance their provision.

The optimal behaviour of firms facing stochastic costs

This paper aims at assessing the optimal behavior of a firm facing stochastic costs of production. In an imperfectly competitive setting, we evaluate to what extent a firm may decide to locate part of its production in other markets different from which it is actually settled. This decision is taken in a stochastic environment. Portfolio theory is used to derive the optimal solution for the intertemporal profit maximization problem. In such a framework, splitting production between different locations may be optimal when a firm is able to charge different prices in the different local markets.Firm behaviour, Portfolio theory, Risk aversion, Uncertainty.

Retrospective Capital Gains Taxation in the Real World

In this article, we analyze Auerbach's (1991) proposal of a retrospective capital gains tax, which is equivalent to an accrual tax on an ex-ante basis. Using a continuous-time model with stochastic interest rates, we prove that equivalence holds even if the risk-free asset return is correlated with other risky assets' returns. However, equivalence fails to hold on an ex-post basis. In other words, if an investor faces a huge gain (loss), the effective tax rate under this system is less (higher) than that what would be due under an accrual tax system. This leads to a fairness problem. For this reason, we also find the conditions that ensure equivalence on an ex-post basis. As will be shown, however, ex-post equivalence can be achieved only if a huge amount of information is available, making its implementation a hard task.capital gains, risk, taxation

Analisi e gestione dei rischi di mercato, di credito e operativo

1openopenFrancesco MenoncinMenoncin, Francesc

The Johansson-Samuelson Theorem in General Equilibrium: A Rebuttal

The well-known Johansson-Samuelson Theorem proves that, in partial equilibrium, comprehensive income taxation with a uniform tax rate is neutral in terms of investment decisions, if fiscal depreciation allowances coincide with economic depreciation. In this article we show that this result does not hold in general equilibrium, unless fairly restrictive conditions are met.general equilibrium, investment neutrality, uniform taxation