Optimal Consumption of a Generalized Geometric Brownian Motion with Fixed and Variable Intervention Costs
We consider the problem of maximizing expected lifetime utility from consumption of a generalized geometric Brownian motion in the presence of controlling costs with a fixed component. Under general assumptions on the utility function and the intervention costs our main result is to show that, if the discount rate is large enough, there always exists an optimal impulse policy for this problem, which is of a Markovian type. We compute explicitly the optimal consumption in the case of constant coefficients of the process, linear utility and a two values discount rate. In this illustrative example the value function is not C1 and the verification theorems commonly used to characterize the optimal control cannot be applied.
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