Pandemic portfolio choice

COVID-19 has taught us that a pandemic can significantly increase biometric risk and at the same time trigger crashes of the stock market. Taking these potential co-movements of financial and non-financial risks into account, we study the portfolio problem of an agent who is aware that a future pandemic can affect her health and personal finances. The corresponding stochastic dynamic optimization problem is complex: It is characterized by a system of Hamilton-Jacobi-Bellman equations which are coupled with optimality conditions that are only given implicitly. We prove that the agent's value function and opti-mal policies are determined by the unique global solution to a system of non-linear ordinary differential equations. We show that the optimal portfolio strategy is significantly affected by the mere threat of a potential pandemic. (c) 2022 Elsevier B.V. All rights reserved.