Optimal Investment Decisions When Time Horizon is Uncertain

Many investors do not know with certainty when their portfolio will be liquidated.


Christophette Blanchet-Scalliet

Université de Nice-Sophia Antipolis

Nicole El Karoui

Ecole Polytechnique

Monique Jeanblanc

Université d'Evry Val d'Essonne

Lionel Martellini

Professor of Finance and Scientific Director of the EDHEC Riskand Asset Management Research Centre

Should their portfolio selection be influenced by the uncertainty of exit time? In order to answer this question, we consider a suitable extension of the familiar optimal investment problem of Merton (1971), where we allow the conditional distribution function of an agent's time horizon to be stochastic and correlated to returns on risky securities. In contrast to existing literature, which has focused on an independent time horizon, we show that the portfolio decision is affected.

Type: Working paper
Date: le 07/05/2007
Research Cluster : Finance

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