Optimal consumption/investment problem with light stocks: A mixed continuous-discrete time approach

This paper addresses the optimal consumption/investment problem in a mixed discrete/continuous time model in presence of rarely traded stocks. Stochastic control theory with state variable driven by a jump-diffusion, via dynamic programming, is used. The theoretical study is validated through numeri...

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Bibliographic Details
Published in:Applied mathematics and computation 2012-02, Vol.218 (12), p.6887-6898
Main Authors: Castellano, Rosella, Cerqueti, Roy
Format: Article
Language:English
Subjects:
Control theory
Dynamic programming
Financing
Investment
Jump-diffusion dynamics
Mathematical models
Monte Carlo simulations
Optimal consumption/investment model
Optimization
Raw materials
State variable
Stochastic control theory
Stochasticity
Thin stocks
Utility maximization
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Summary:This paper addresses the optimal consumption/investment problem in a mixed discrete/continuous time model in presence of rarely traded stocks. Stochastic control theory with state variable driven by a jump-diffusion, via dynamic programming, is used. The theoretical study is validated through numerical experiments, and the proposed model is compared with the classical Merton’s portfolio. Some financial insights are provided.
ISSN:0096-3003
1873-5649
DOI:10.1016/j.amc.2011.12.065