Optimal consumption and portfolio rules when the asset price is driven by a time-inhomogeneous Markov modulated fractional Brownian motion with

Benjamín Vallejo Jiménez () and Francisco Venegas Martínez ()
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Benjamín Vallejo Jiménez: Escuela Superior de Economía, Instituto Politécnico Nacional
Francisco Venegas Martínez: Escuela Superior de Economía, Instituto Politécnico Nacional
Authors registered in the RePEc Author Service: Francisco Venegas-Martínez

Economics Bulletin, 2017, vol. 37, issue 1, 314-326

Abstract: This paper is aimed at developing a stochastic model to study the behavior of a rational consumer that makes consumption and portfolio decisions when the asset price is driven by a time-inhomogeneous Markov modulated fractional Brownian motion combined with multiple Poisson jumps. We provide closed-form solutions. The addition of a time-inhomogeneous Markov is useful to model structural changes related to the physical trend, the instantaneous volatility and the interest rate, improving the understanding of portfolio dynamic behavior. Multiple jumps can be associated with sudden and unexpected leaps of the price itself, the sector, related markets, and the economic and business atmosphere, which provides a richer environment to the consumer's decision making problem under uncertainty.

Keywords: Markov modulated process; stochastic optimal control; rational consumer; regime switching; Poisson jumps; fractional Brownian motion. (search for similar items in EconPapers)
JEL-codes: C6 D1 (search for similar items in EconPapers)
Date: 2017-02-22
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Citations: View citations in EconPapers (1)

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