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Optimal Entry and Consumption under Habit Formation

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  • Yue Yang
  • Xiang Yu

Abstract

This paper studies a composite problem involving the decision making of the optimal entry time and dynamic consumption afterwards. In stage-1, the investor has access to full market information subjecting to some information costs and needs to choose an optimal stopping time to initiate stage-2; in stage-2, the investor terminates the costly full information acquisition and starts dynamic investment and consumption under partial observations of free public stock prices. The habit formation preference is employed, in which the past consumption affects the investor's current decisions. By using the stochastic Perron's method, the value function of the composite problem is proved to be the unique viscosity solution of some variational inequalities.

Suggested Citation

  • Yue Yang & Xiang Yu, 2019. "Optimal Entry and Consumption under Habit Formation," Papers 1903.04257, arXiv.org, revised Jul 2021.
    • Handle: RePEc:arx:papers:1903.04257
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    References listed on IDEAS

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    Cited by:

    1. Junbeom Lee & Xiang Yu & Chao Zhou, 2019. "Lifetime Ruin under High-watermark Fees and Drift Uncertainty," Papers 1909.01121, arXiv.org, revised Oct 2020.

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