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Optimal retirement in presence of stochastic labor income: a free boundary approach in presence of an incomplete market

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  • Daniele Marazzina

Abstract

In this note, we show how to solve an optimal retirement problem in presence of a stochastic wage dealing with a free boundary problem. In particular, we show how to deal with an incomplete market case, where the wage cannot be fully hedged investing in the risk-free and the risky asset describing the financial market.

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  • Daniele Marazzina, 2024. "Optimal retirement in presence of stochastic labor income: a free boundary approach in presence of an incomplete market," Papers 2407.19190, arXiv.org.
    • Handle: RePEc:arx:papers:2407.19190
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    References listed on IDEAS

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    1. Dybvig, Philip H. & Liu, Hong, 2010. "Lifetime consumption and investment: Retirement and constrained borrowing," Journal of Economic Theory, Elsevier, vol. 145(3), pages 885-907, May.
    2. He, Hua & Pages, Henri F, 1993. "Labor Income, Borrowing Constraints, and Equilibrium Asset Prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(4), pages 663-696, October.
    3. Ding, Guodong & Marazzina, Daniele, 2022. "The impact of liquidity constraints and cashflows on the optimal retirement problem," Finance Research Letters, Elsevier, vol. 49(C).
    4. Lucie Teplå, 2000. "Optimal Hedging and Valuation of Nontraded Assets," Review of Finance, European Finance Association, vol. 4(3), pages 231-251.
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