Robust Solutions to the Life-Cycle Consumption Problem
Reus
L
author
Fabozzi
F
J
author
2021
This paper demonstrates how the well-known discrete life-cycle consumption problem (LCP) can be solved using the Robust Counterpart (RC) formulation technique, as defined in Ben-Tal and Nemirovski (Math Oper Res 23(4):769-805, 1998). To do this, we propose a methodology that involves applying a change of variables over the original consumption before deriving the RC. These transformations allow deriving a closed solution to the inner problem, and thus to solve the LCP without facing the curse of dimensionality and without needing to specify the prior distribution for the investment opportunity set. We generalize the methodology and illustrate how it can be used to solve other type of problems. The results show that our methodology enables solving long-term instances of the LCP (30 years). We also show it provides an alternative consumption pattern as to the one provided by a benchmark that uses a dynamic programming approach. Rather than finding a consumption that maximizes the expected lifetime utility, our solution delivers higher utilities for worst-case scenarios of future returns.
Life-cycle consumption problem
Intertemporal portfolio-choice problem
Robust optimization
Robust counterpart framework
exported from refbase (show.php?record=1086), last updated on Thu, 11 Nov 2021 15:49:21 -0300
text
10.1007/s10614-019-09964-1
Reus+Fabozzi2021
UAI @ eduardo.moreno @ Reus2020
Computational Economics
Comput. Econ.
2021
continuing
periodical
academic journal
57
481
499
0927-7099