Abstract:
This paper examines the importance of jumps in asset prices for investment problems potentially incorporating consumption decisions. We present a technique for solving investment-consumption problems when asset prices jump. We also demonstrate how to quantify utility losses using an "optimal fee" approach - measuring how much a portfolio advisor could charge an investor to provide them with the new investment technology. As an application we consider empirically plausible models for the S&P 500 index. We conclude that while there are some moderate differences in optimal investment behaviour once jumps are accounted for the actual utility loss in economic terms is very low.
