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Utility maximization with current utility on the wealth: regularity of solutions to the HJB equation

Salvatore Federico (), Paul Gassiat () and Fausto Gozzi

Finance and Stochastics, 2015, vol. 19, issue 2, 415-448

Abstract: This paper deals with an investment–consumption portfolio problem when the current utility depends also on the wealth process. Such problems arise e.g. in portfolio optimization with random horizon or random trading times. To overcome the difficulties of the problem, a dual approach is employed: a dual control problem is defined and treated by means of dynamic programming, showing that the viscosity solutions of the associated Hamilton–Jacobi–Bellman equation belong to a suitable class of smooth functions. This allows defining a smooth solution of the primal Hamilton–Jacobi–Bellman equation, and proving by verification that such a solution is indeed unique in a suitable class of smooth functions and coincides with the value function of the primal problem. Applications to specific financial problems are given. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Optimal stochastic control; Investment–consumption problem; Duality; Hamilton–Jacobi–Bellman equation; Regularity of viscosity solutions; 93E20; 49L20; 90C46; 91G80; 35B65; C61; G11 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s00780-015-0257-z

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