Minimizing the Probability of Ruin when Consumption is Ratcheted
Erhan Bayraktar, Virginia R. Young
TL;DR
This paper investigates optimal investment strategies for agents with ratcheted consumption to minimize the probability of financial ruin, providing a framework for advising such agents on risk management.
Contribution
It introduces a novel approach to optimize investment strategies under ratcheted consumption constraints to reduce ruin probability.
Findings
Derived explicit optimal investment strategies.
Quantified the impact of ratcheted consumption on ruin probability.
Provided guidelines for financial advising under non-decreasing consumption.
Abstract
We assume that an agent's rate of consumption is {\it ratcheted}; that is, it forms a non-decreasing process. Given the rate of consumption, we act as financial advisers and find the optimal investment strategy for the agent who wishes to minimize his probability of ruin.
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