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It shows that with hedgeable interest rate risk, the optimal portfolio consists of two parts: a pure constant relative risk aversion optimal portfolio and a financing bond portfolio for investor future subsistence requirements. Under such a structure, the wealth growth rate is always higher for HARA investors with more initial wealth, leading to increased wealth inequality regardless of the underlying model dynamics and realized market scenario. Using the decomposition, the authors solve the HARA optimal policy in closed form under an incomplete-market model with both stochastic interest rate and volatility. The wealth effect in the optimal portfolio has interesting implications. It generates a procyclical pattern in investor stock positions and time-varying risk aversion levels as well as a \u201cbuy high, sell low\u201d market timing effect that may hurt HARA investors with low initial wealth.<\/jats:p>","DOI":"10.1287\/opre.2024.0976","type":"journal-article","created":{"date-parts":[[2025,9,16]],"date-time":"2025-09-16T14:22:07Z","timestamp":1758032527000},"page":"93-117","source":"Crossref","is-referenced-by-count":1,"title":["Dynamic Portfolio Allocation Under Market Incompleteness and Wealth Effects"],"prefix":"10.1287","volume":"74","author":[{"ORCID":"https:\/\/orcid.org\/0000-0002-9170-9044","authenticated-orcid":false,"given":"Yiwen","family":"Shen","sequence":"first","affiliation":[{"name":"School of Business and Management, Hong Kong University of Science and Technology, Hong Kong"}]},{"ORCID":"https:\/\/orcid.org\/0000-0002-6002-2610","authenticated-orcid":false,"given":"Chenxu","family":"Li","sequence":"additional","affiliation":[{"name":"Guanghua School of Management, Peking University, Beijing 100871, China"}]},{"ORCID":"https:\/\/orcid.org\/0000-0002-3948-6891","authenticated-orcid":false,"given":"Olivier","family":"Scaillet","sequence":"additional","affiliation":[{"name":"Swiss Finance Institute, 8006 Geneva, Switzerland; and Finance and Statistics, Geneva Finance Research Institute, University of Geneva, 1211 Geneva, Switzerland"}]},{"ORCID":"https:\/\/orcid.org\/0009-0007-5801-1457","authenticated-orcid":false,"given":"Yueting","family":"Jiang","sequence":"additional","affiliation":[{"name":"Chinese University of Hong Kong Business School, Chinese University of Hong Kong, Hong Kong"}]}],"member":"109","reference":[{"key":"B1","doi-asserted-by":"publisher","DOI":"10.1016\/j.jfineco.2005.10.006"},{"key":"B2","doi-asserted-by":"publisher","DOI":"10.1016\/j.jfineco.2010.05.004"},{"key":"B3","doi-asserted-by":"publisher","DOI":"10.1287\/mnsc.2013.1806"},{"key":"B4","doi-asserted-by":"publisher","DOI":"10.1257\/aer.20170666"},{"key":"B5","doi-asserted-by":"publisher","DOI":"10.1093\/rfs\/hhq028"},{"key":"B6","doi-asserted-by":"publisher","DOI":"10.1016\/j.jfineco.2018.03.002"},{"key":"B7","doi-asserted-by":"publisher","DOI":"10.1016\/B978-0-444-50897-3.50008-0"},{"key":"B8","doi-asserted-by":"publisher","DOI":"10.1111\/j.1540-6261.2009.01533.x"},{"key":"B9","doi-asserted-by":"publisher","DOI":"10.1111\/jofi.12125"},{"key":"B10","doi-asserted-by":"publisher","DOI":"10.1086\/250059"},{"key":"B11","doi-asserted-by":"publisher","DOI":"10.1287\/opre.2021.2234"},{"key":"B12","doi-asserted-by":"publisher","DOI":"10.2307\/2171853"},{"key":"B13","doi-asserted-by":"publisher","DOI":"10.1093\/rfs\/hhi035"},{"key":"B14","doi-asserted-by":"publisher","DOI":"10.1016\/0022-0531(89)90067-7"},{"key":"B15","doi-asserted-by":"publisher","DOI":"10.2307\/1911242"},{"key":"B16","doi-asserted-by":"publisher","DOI":"10.1214\/aoap\/1177005576"},{"key":"B17","doi-asserted-by":"publisher","DOI":"10.1016\/j.red.2017.06.002"},{"key":"B18","doi-asserted-by":"publisher","DOI":"10.1007\/s10957-012-0208-1"},{"key":"B19","doi-asserted-by":"publisher","DOI":"10.1111\/j.1467-9965.2005.00250.x"},{"key":"B20","doi-asserted-by":"publisher","DOI":"10.1093\/rfs\/hhp040"},{"key":"B21","doi-asserted-by":"publisher","DOI":"10.1111\/1540-6261.00529"},{"key":"B22","doi-asserted-by":"publisher","DOI":"10.2307\/2951600"},{"key":"B23","doi-asserted-by":"publisher","DOI":"10.1111\/1468-0262.00164"},{"key":"B24","doi-asserted-by":"publisher","DOI":"10.1016\/S0165-1889(97)00002-X"},{"key":"B25","volume-title":"The Economics of Continuous-Time Finance","author":"Dumas B","year":"2017"},{"key":"B26","doi-asserted-by":"publisher","DOI":"10.3982\/ECTA14835"},{"key":"B27","doi-asserted-by":"publisher","DOI":"10.1016\/j.jfineco.2018.02.007"},{"key":"B28","doi-asserted-by":"publisher","DOI":"10.1287\/opre.1060.0279"},{"key":"B29","doi-asserted-by":"crossref","unstructured":"He XD, Jiang Z (2020) Dynamic mean-variance efficient fractional Kelly portfolios in a stochastic volatility model. 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