The optimal investment problem with inflation and liquidity risk

Inflation, liquidity and labor supply flexibility are three macroeconomic factors that significantly affect financial assets pricing. All three factors need to be considered in creating investment policies to minimize the bias and achieve the optimal portfolio selection. This paper jointly considers the impact of these three factors on the optimal investment-consumption strategy. We start with measuring liquidity with a jump diffusion process and propose a new utility function. Then we derive the Hamilton- Jacobi-Bellman (HJB) equation for the value function. Next, the analytical solution of the optimal strategy are obtained under the cases of stochastic and non-stochastic wages, respectively. Finally, numerical examples are provided to show the impact of these three factors on portfolio selections.(c) 2023 Elsevier B.V. All rights reserved.