A numerical approach to solve consumption-portfolio problems with predictability in income, stock prices, and house prices (Q2661755)

The author establishes a numerical method to solve a generic consumption-portfolio choice problem with predictability in stock prices, house prices, and labor income. This generalizes the SAMS method to state-dependent modifiers by setting up artificial markets to derive closed-form solutions for life-cycle problem and transform the resulting consumption-portfolio strategies into feasible ones in the true market. To obtain transformed-feasible strategies that are close to the truly, unknown optimal strategies, state-dependent modifiers are introduced; this generalization of the SAMS method reduces the welfare losses from over 10\% to less than 2\%.