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Optimal Stopping of Active Portfolio Management

Author

Listed:
  • Kyoung Jin Choi

    (Department of Mathematics, KAIST, Korea Advanced Institute of Science and Technology)

  • Hyeng Keun Koo

    (School of Business Administration, Ajou University)

  • Do Young Kwak

    (Department of Mathematics, KAIST)

Abstract

We study an investor¡¯s decision to switch from active portfolio management to passive management. This problem is mathematically modelled by a mixture of a consumption-portfolio selection problem and an optimal stopping problem. We assume that the investor has stochastic differential utility with ambiguity aversion and incurs utility loss from active portfolio management that can be avoided by switching to passive management, and show that she manages actively as long as her level of wealth is above a certain threshold. The threshold wealth level is shown to be an increasing function of both the coefficient of ambiguity aversion and the utility cost of active management.

Suggested Citation

  • Kyoung Jin Choi & Hyeng Keun Koo & Do Young Kwak, 2004. "Optimal Stopping of Active Portfolio Management," Annals of Economics and Finance, Society for AEF, vol. 5(1), pages 93-126, May.
    • Handle: RePEc:cuf:journl:y:2004:v:5:i:1:p:93-126
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    References listed on IDEAS

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    Cited by:

    1. Xiongfei Jian & Xun Li & Fahuai Yi, 2014. "Optimal Investment with Stopping in Finite Horizon," Papers 1406.6940, arXiv.org.
    2. Dai, Darong & Shen, Kunrong, 2012. "A New Stationary Game Equilibrium Induced by Stochastic Group Evolution and Rational Individual Choice," MPRA Paper 40586, University Library of Munich, Germany, revised 09 Aug 2012.
    3. Dai, Darong, 2011. "Modeling the minimum time needed to economic maturity," MPRA Paper 40386, University Library of Munich, Germany, revised 31 Jul 2012.
    4. Xun Li & Xianping Wu & Wenxin Zhou, 2017. "Optimal stopping investment in a logarithmic utility-based portfolio selection problem," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 3(1), pages 1-10, December.
    5. Dai, Darong & Shen, Kunrong, 2012. "A new stationary game equilibrium induced by stochastic group evolution and rational Individual choice," MPRA Paper 40133, University Library of Munich, Germany.

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    More about this item

    Keywords

    Consumption-portfolio selection; Active management; Passive management; Discretionary stopping time; Recursive utility; Stochastic differential utility; Optimal switching; Ambiguity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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