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Optimal Investment and Consumption under a Habit-Formation Constraint

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  • Bahman Angoshtari
  • Erhan Bayraktar
  • Virginia R. Young

Abstract

We formulate an infinite-horizon optimal investment and consumption problem, in which an individual forms a habit based on the exponentially weighted average of her past consumption rate, and in which she invests in a Black-Scholes market. The individual is constrained to consume at a rate higher than a certain proportion $\alpha$ of her consumption habit. Our habit-formation model allows for both addictive ($\alpha=1$) and nonaddictive ($0

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  • Bahman Angoshtari & Erhan Bayraktar & Virginia R. Young, 2021. "Optimal Investment and Consumption under a Habit-Formation Constraint," Papers 2102.03414, arXiv.org, revised Nov 2021.
    • Handle: RePEc:arx:papers:2102.03414
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    References listed on IDEAS

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    Cited by:

    1. Zongxia Liang & Xiaodong Luo & Fengyi Yuan, 2022. "Consumption-investment decisions with endogenous reference point and drawdown constraint," Papers 2204.00530, arXiv.org, revised Nov 2022.

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