Quotation Geyer, Alois, Hanke, Michael, Weissensteiner, Alex. 2009. Life-cycle Asset Allocation and Consumption Using Stochastic Linear Programming. Journal of Computational Finance 12 (4): 29-50.




We consider optimal consumption and (strategic) asset allocation of an investor with uncertain lifetime. The problem is solved using a multi-stage stochastic linear programming (SLP) model to be able to generalize the closed-form solution obtained by Richard (1975). We account for aspects of the application of the SLP approach which arise in the context of life-cycle asset allocation, but are also relevant for other problems of similar structure. The objective is to maximize the expected utility of consumption over the lifetime and of bequest at the time of death of the investor. Since we maximize utility (rather than other objectives which can be implemented more easily) we provide a new approach to optimize the breakpoints required for the linearization of the utility function. The uncertainty of the problem is described by discrete scenario trees. The model solves for the rebalancing decisions in the first few years of the investor's lifetime, accounting for anticipated cash flows in the near future, and applies Richard's closed-form solution for the long, subsequent steady-state period. In our numerical examples we first show that available closed-form solutions can be accurately replicated with the SLP-based approach. Second, we add elements to the problem specification which are usually beyond the scope of closed-form solutions. We find that the SLP approach is well suited to account for these extensions of the classical Merton setting.


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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Journal of Computational Finance
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, INF-A, STRAT-B, VW-D, WH-B
Language English
Title Life-cycle Asset Allocation and Consumption Using Stochastic Linear Programming
Volume 12
Number 4
Year 2009
Page from 29
Page to 50
Reviewed? Y


Life-cycle Portfolio Management
Geyer, Alois (Details)
Hanke, Michael (Former researcher)
Weissensteiner, Alex (Universität Innsbruck, Austria)
Institute for Financial Research IN (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
1121 Operations research (Details)
5361 Financial management (Details)
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