Optimal Consumption with Reference to Past Spending Maximum

Autor:	Deng, Shuoqing, Li, Xun, Pham, Huyen, Yu, Xiang
Rok vydání:	2020
Předmět:	Quantitative Finance - Mathematical Finance Mathematics - Optimization and Control Mathematics - Probability
Druh dokumentu:	Working Paper
Popis:	This paper studies the infinite-horizon optimal consumption with a path-dependent reference under exponential utility. The performance is measured by the difference between the nonnegative consumption rate and a fraction of the historical consumption maximum. The consumption running maximum process is chosen as an auxiliary state process, and hence the value function depends on two state variables. The Hamilton-Jacobi-Bellman (HJB) equation can be heuristically expressed in a piecewise manner across different regions to take into account all constraints. By employing the dual transform and smooth-fit principle, some thresholds of the wealth variable are derived such that a classical solution to the HJB equation and the feedback optimal investment and consumption strategies can be obtained in closed form in each region. A complete proof of the verification theorem is provided, and numerical examples are presented to illustrate some financial implications. Comment: Final version, forthcoming in Finance and Stochastics
Databáze:	arXiv
Externí odkaz:	http://arxiv.org/abs/2006.07223 Zobrazit plný text záznamu View this record from Arxiv