Optimal portfolio selection with consumption and nonlinear integro-differential equations with gradient constraint: A viscosity solution approach
AbstractWe study a problem of optimal consumption and portfolio selection in a market where the logreturns of the uncertain assets are not necessarily normally distributed. The natural models then involve pure-jump Lévy processes as driving noise instead of Brownian motion like in the Black and Scholes model. The state constrained optimization problem involves the notion of local substitution and is of singular type. The associated Hamilton-Jacobi-Bellman equation is a nonlinear first order integro-differential equation subject to gradient and state constraints. We characterize the value function of the singular stochastic control problem as the unique constrained viscosity solution of the associated Hamilton-Jacobi-Bellman equation. This characterization is obtained in two main steps. First, we prove that the value function is a constrained viscosity solution of an integro-differential variational inequality. Second, to ensure that the characterization of the value function is unique, we prove a new comparison (uniqueness) result for the state constraint problem for a class of integro-differential variational inequalities. In the case of HARA utility, it is possible to determine an explicit solution of our portfolio-consumption problem when the Lévy process posseses only negative jumps. This is, however, the topic of a companion paper .
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Finance and Stochastics.
Volume (Year): 5 (2001)
Issue (Month): 3 ()
Note: received: July 1999; final version received: April 2000
Contact details of provider:
Web page: http://www.springerlink.com/content/101164/
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Azcue, Pablo & Muler, Nora, 2012. "Optimal dividend policies for compound Poisson processes: The case of bounded dividend rates," Insurance: Mathematics and Economics, Elsevier, vol. 51(1), pages 26-42.
- Jan Kallsen & Johannes Muhle-Karbe, 2009. "Utility maximization in models with conditionally independent increments," Papers 0911.3608, arXiv.org.
- Albrecher, Hansjörg & Thonhauser, Stefan, 2008. "Optimal dividend strategies for a risk process under force of interest," Insurance: Mathematics and Economics, Elsevier, vol. 43(1), pages 134-149, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.