Optimal investment, consumption–leisure, insurance and retirement choice
 Ryle S. Perera
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In this paper, we study an optimal consumption–leisure, investment, insurance and retirement choice problem of an infinitely lived economic agent with constant elasticity of substitution (CES) preferences. We incorporate random insurable losses that are independent of risky asset returns (negative monetary shocks) and impose shortsale constraint on the risky asset to formulate this optimal choice model. When the wealth process is subject to insurable negative monetary shocks produced by a general marked point process, the challenge is to derive an optimal allocation of the agent’s wealth between a portfolio investment and an insurance (costly) strategy. Without imposing the level of insurance to be within interval \(\left[ {0,1} \right]\) ; we capture the agent’s instantaneous preferences for consumption and leisure via CES preference, while integrating the optimal consumption–leisure–work tradeoffs, the optimal portfolio selection, optimal level of insurance and his/her optimal retirement time. We use the Martingale technique to formulate the optimization problem and solve the optimal policies of the agent by applying the variational inequality arising from the dual functions of the optimal stopping times. Our results demonstrate that a lack of insurance against large negative monetary shocks is positively correlated with lower participation rate in the equity market and high savings rates when shortsale constraint is binding. The optimal retirement time is characterized as the first time when his/her wealth exceeds a critical level of wealth.
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 Title
 Optimal investment, consumption–leisure, insurance and retirement choice
 Journal

Annals of Finance
Volume 9, Issue 4 , pp 689723
 Cover Date
 20131101
 DOI
 10.1007/s1043601202141
 Print ISSN
 16142446
 Online ISSN
 16142454
 Publisher
 Springer Berlin Heidelberg
 Additional Links
 Topics
 Keywords

 Consumption–Leisure
 Duality method
 Labor income
 Martingale method
 Monetary Shocks
 Shortsale prohibition
 C 61
 C 73
 G 1
 G10
 G11
 Industry Sectors
 Authors

 Ryle S. Perera ^{(1)} ^{(2)}
 Author Affiliations

 1. Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University, Sydney, NSW, 2109, Australia
 2. Department of Applied Mathematics and Statistics, Whiting School of Engineering, The Johns Hopkins University, Baltimore, MD, 21218, USA