Semi-analytical solution for consumption and investment problem under quadratic security market model with inflation risk

Age-dependent Robust Strategic Asset Allocation with Inflation-Deflation Hedging Demand

“…The class of quadratic security market models, which is a generalization of affine models (Duffie and Kan [13]), has been independently developed by Ahn, Dittmar, and Gallant [1] and Leippold and Wu [18]. 1 Batbold et al [5] derive a semi-analytical solution and the optimal portfolio decomposed into myopic demand, intertemporal hedging demand, and inflation-deflation hedging demand. 2 Their numerical analysis demonstrates the nonlinearity and significance of the market timing effects in the optimal asset allocation.…”

“…Strategic asset allocation (Brennan, Schwartz, and Lagnado [8], Campbell and Viceira [11]) underscores the magnitude of the market timing effects of intertemporal hedging demand; however, findings are mixed. 5 The results of Batbold et al [5] and Kikuchi and Kusuda [16] shed new light on the effectiveness of strategic asset allocation from a different perspective: the market timing effects of inflation-deflation hedging demand. 1 Quadratic security market models are employed in security pricing studies (Chen, Filipović, and Poor [12], Kim and Singleton [17], Filipović, Gourier, and Mancini [14]) and optimal consumption-investment studies (Batbold et al [5], Kikuchi and Kusuda [16]).…”

“…5 The results of Batbold et al [5] and Kikuchi and Kusuda [16] shed new light on the effectiveness of strategic asset allocation from a different perspective: the market timing effects of inflation-deflation hedging demand. 1 Quadratic security market models are employed in security pricing studies (Chen, Filipović, and Poor [12], Kim and Singleton [17], Filipović, Gourier, and Mancini [14]) and optimal consumption-investment studies (Batbold et al [5], Kikuchi and Kusuda [16]). 2 Batbold et al [5] term it "inflation hedging demand"; however, we call it "inflationdeflation hedging demand" following Kikuchi and Kusuda [16].…”

“…1 Quadratic security market models are employed in security pricing studies (Chen, Filipović, and Poor [12], Kim and Singleton [17], Filipović, Gourier, and Mancini [14]) and optimal consumption-investment studies (Batbold et al [5], Kikuchi and Kusuda [16]). 2 Batbold et al [5] term it "inflation hedging demand"; however, we call it "inflationdeflation hedging demand" following Kikuchi and Kusuda [16]. 3 A utility function U is homothetic if, for any consumption plan c and c, and any scaler…”

“…Note that as relative ambiguity aversion declines with age in homothetic age-dependent robust utility, aging influences the optimal portfolio weights. This study considers the finite-time consumption-investment problem for investors with homothetic age-dependent robust utility under the quadratic security market model of Batbold et al [5]. Our aim is to derive an approximate optimal portfolio and quantitatively evaluates the age effects on homothetic age-dependent robust utility.…”