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Optimal Consumption and Portfolio Decision with Heston’s SV Model Under HARA Utility Criterion

Author

Listed:
  • Wang Chunfeng
  • Chang Hao
  • Fang Zhenming

    (College of Management and Economics, Tianjin University, Tianjin300072, China)

Abstract

This paper studies the optimal consumption-investment strategy with Heston’s stochastic volatility (SV) model under hyperbolic absolute risk aversion (HARA) utility criterion. The financial market is composed of a risk-less asset and a risky asset, whose price process is supposed to be driven by Heston’s SV model. The risky preference of the individual is assumed to satisfy HARA utility, which recovers power utility, exponential utility and logarithm utility as special cases. HARA utility is of general framework in the utility theory and is seldom studied in the existing literatures. Legendre transform-dual technique along with stochastic dynamic programming principle is presented to deal with our problem and the closed-form solution to the optimal consumption-investment strategy is successfully obtained. Finally, some special cases are derived in detail.

Suggested Citation

  • Wang Chunfeng & Chang Hao & Fang Zhenming, 2017. "Optimal Consumption and Portfolio Decision with Heston’s SV Model Under HARA Utility Criterion," Journal of Systems Science and Information, De Gruyter, vol. 5(1), pages 21-33, February.
    • Handle: RePEc:bpj:jossai:v:5:y:2017:i:1:p:21-33:n:2
    DOI: 10.21078/JSSI-2017-021-13
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    References listed on IDEAS

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    Cited by:

    1. Andreas Lichtenstern & Pavel V. Shevchenko & Rudi Zagst, 2019. "Optimal life-cycle consumption and investment decisions under age-dependent risk preferences," Papers 1908.09976, arXiv.org.

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