FIN-01-034

An Approximation Algorithm for Optimal Consumption/Investment Problems

June 20, 2001

Sanjiv Ranjan Das and Rangarajan K. Sundaram

ABSTRACT

This article develops a simple approach to solving continuous-time portfolio choice problems. Portfolio problems for which no closed-form solutions are available may be handled by this technique, which substitutes the numerical solution of partial differential equations with a non-linear numerical algorithm approximating the solution. This paper complements the wide literature in economics on the solution of dynamic problems in dicrete time. The algorithm is parismonious, and is illustrated by solving two examples, one, the standard Merton problem, and two, a jump-diffusion problem.


Sanjiv Ranjan Das
Institution: Leavey School of Business, Santa Clara University, Santa Clara, CA 95053
Email: srdas@scu.edu

Rangarajan K. Sundaram
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0308
Fax: (212) 995-4233
Email: rsundara@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~rsundara

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