We consider a finite continuous-time optimal consumption and in-ternational asset allocation problem for an agent with CRRA utility, assuming a quadratic factor international security market model in which, latent factors are constituted of global economy factors and currency specific factors. It is not generally straightforward to find an analytical solution to the partial differential equation (PDE, hereafter) for the agent’s indirect utility function, since a non-homogeneous term appears in the PDE. We apply a method of Liu [11] and Batbold et al. [4] to the PDE, and derive a semi-analytical solution. In the optimal investment ratio based on the solution, the market price of currency specific risk, the disparities between domestic and foreign market prices of global economy risk, and the disparities between domestic and for-eign market prices of currency specific risk appear.
A Semi-analytical Solution to Consumption and International Asset Allocat ion Problem
DPB17Kusuda
(290.12KB)
