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Mathematical Problems in Engineering
Volume 2014 (2014), Article ID 153793, 6 pages
http://dx.doi.org/10.1155/2014/153793
Research Article

Portfolio Selection with Subsistence Consumption Constraints and CARA Utility

1Department of Financial Engineering, Ajou University, Suwon 443-749, Republic of Korea
2Department of Mathematics, Sookmyung Women’s University, Seoul 140-742, Republic of Korea

Received 2 January 2014; Revised 25 March 2014; Accepted 6 April 2014; Published 16 April 2014

Academic Editor: Pankaj Gupta

Copyright © 2014 Gyoocheol Shim and Yong Hyun Shin. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We consider the optimal consumption and portfolio choice problem with constant absolute risk aversion (CARA) utility and a subsistence consumption constraint. A subsistence consumption constraint means there exists a positive constant minimum level for the agent’s optimal consumption. We use the dynamic programming approach to solve the optimization problem and also give the verification theorem. We illustrate the effects of the subsistence consumption constraint on the optimal consumption and portfolio choice rules by the numerical results.