Optimal Consumption and Investment under Time-Varying Liquidity Constraints

Abstract

We study consumption and investment decisions given realistic time-varying constraints on borrowing. We first consider the case where borrowing is constrained by a maximum debt-to-income ratio. We then consider collateral borrowing with a maximum loan-to-value ratio. The resulting implications for optimal policies differ considerably from those obtained in the existing literature based on fixed borrowing limits but are consistent with those documented in the empirical literature.

Finite horizon portfolio selection problems with stochastic borrowing constraints

“…Our contributions are as follows. First, we extend the result of Ahn et al [2] to finite horizon. To the best of our knowledge, our paper is the first one to consider stochastic borrowing constraint under the finite horizon.…”

“…The assumption is made to simplify the analysis, avoiding issues related to incompleteness of the financial/insurance market. Ahn et al[2] have made a similar assumption.…”

“…Park and Jang [24] study an optimal consumption and investment policies with a negative wealth constraints. Recently, Ahn et al [2] derived the closed-form solution of the portfolio selection problem with time-varying liquidity constraints which is exogenously specified. Choi et al [4] study a continuous-time model of consumption and portfolio selection with endogenously determined credit limits.…”

“…Similar to Ahn et al [2] we assume that the agent faces the following borrowing constraints: for ν, 0 ≤ ν < 1…”

Optimal retirement with borrowing constraints and forced unemployment risk

“…For instance, Carroll (1992), Cocco et al (2005), Polkovnichenko (2007), Munk and Sørensen (2010), Lynch and Tan (2011), Wang et al (2016), and Ahn et al (2019).…”