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Optimal Investment and Consumption in Financial Markets with Integrated Variance Clocks

Author

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  • Eduardo Abi Jaber
  • Florian Gutekunst
  • Martin Herdegen
  • David Hobson

Abstract

We study the infinite-horizon optimal investment and consumption problem in a general class of continuous financial markets, where uncertainty is driven by a continuous non-decreasing stochastic clock representing accumulated variance. This framework encompasses classical Markovian and non-Markovian stochastic volatility models as well as singular realized-variance models in which no spot volatility process exists. We characterize the value process and optimal investment and consumption strategies in terms of a non-linear infinite-horizon backward stochastic differential equation driven jointly by calendar time and the stochastic clock. We develop a general well-posedness theory for this new class of IVC-BSDEs based on the method of sub- and supersolutions, establishing existence, uniqueness, and stability under natural conditions that might be of independent interest beyond the financial application at hand. We are moreover able to identify the sign of the $Z$-component of the solution using Malliavin calculus. We then apply our results to Volterra Heston models with locally integrable kernels, covering both rough and hyper-rough regimes. Exploiting the affine structure of the model, we verify the optimality of the candidate strategies in incomplete markets and obtain an explicit representation of the solution in the complete market case. Owing to the generality of the framework and the weak assumptions imposed on the stochastic clock, our results unify and extend several existing results for optimal investment and consumption, including classical Markovian stochastic volatility models.

Suggested Citation

  • Eduardo Abi Jaber & Florian Gutekunst & Martin Herdegen & David Hobson, 2026. "Optimal Investment and Consumption in Financial Markets with Integrated Variance Clocks," Papers 2609.26349, arXiv.org.
  • Handle: RePEc:arx:papers:2609.26349
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    References listed on IDEAS

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    4. Nualart,David & Nualart,Eulalia, 2018. "Introduction to Malliavin Calculus," Cambridge Books, Cambridge University Press, number 9781107039124, June.
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    6. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
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