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Optimal consumption policies in illiquid markets

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  • Alessandra Cretarola

    ()
    (Dipartimento di Scienze Economiche e Aziendali - Libera Università INTERNAZIONALE DEGLI STUDI SOCIALI G. CARLI)

  • Fausto Gozzi

    ()
    (Dipartimento di Scienze Economiche e Aziendali - Libera Università INTERNAZIONALE DEGLI STUDI SOCIALI G. CARLI)

  • Huyên Pham

    ()
    (PMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique)

  • Peter Tankov

    ()
    (PMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Pierre et Marie Curie - Paris VI - Université Paris-Diderot - Paris VII)

Abstract

We investigate optimal consumption policies in the liquidity risk model introduced in Pham and Tankov (2007). Our main result is to derive smoothness results for the value functions of the portfolio/consumption choice problem. As an important consequence, we can prove the existence of the optimal control (portfolio/consumption strategy) which we characterize both in feedback form in terms of the derivatives of the value functions and as the solution of a second-order ODE. Finally, numerical illustrations of the behavior of optimal consumption strategies between two trading dates are given.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00292673.

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Date of creation: 02 Jul 2008
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Handle: RePEc:hal:wpaper:hal-00292673

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Related research

Keywords: Illiquid market; optimal consumption; integrodifferential equations; viscosity solutions; semiconcavity; sub(super) differentials; optimal control;

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References

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  1. Huy�n Pham & Peter Tankov, 2008. "A Model Of Optimal Consumption Under Liquidity Risk With Random Trading Times," Mathematical Finance, Wiley Blackwell, vol. 18(4), pages 613-627.
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Cited by:
  1. Castellano, Rosella & Cerqueti, Roy, 2014. "Mean–Variance portfolio selection in presence of infrequently traded stocks," European Journal of Operational Research, Elsevier, vol. 234(2), pages 442-449.
  2. Paul Gassiat & Fausto Gozzi & Huy\^en Pham, 2011. "Investment/consumption problem in illiquid markets with regime-switching," Papers 1107.4210, arXiv.org, revised Apr 2012.
  3. Paul Gassiat & Huyen Pham & Mihai Sirbu, 2009. "Optimal investment on finite horizon with random discrete order flow in illiquid markets," Papers 0907.2203, arXiv.org.
  4. Salvatore Federico & Paul Gassiat & Fausto Gozzi, 2012. "Impact of time illiquidity in a mixed market without full observation," Papers 1211.1285, arXiv.org.
  5. Stefano Baccarin, 2013. "Optimal Consumption of a Generalized Geometric Brownian Motion with Fixed and Variable Intervention Costs," Working papers 021, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
  6. Michael Ludkovski & Hyekyung Min, 2010. "Illiquidity Effects in Optimal Consumption-Investment Problems," Papers 1004.1489, arXiv.org, revised Sep 2010.

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