Optimal Investment and Consumption with Proportional Transaction Costs in Regime-Switching Model

Ruihua Liu ()
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Ruihua Liu: University of Dayton

Journal of Optimization Theory and Applications, 2014, vol. 163, issue 2, No 14, 614-641

Abstract: Abstract This paper is concerned with an infinite-horizon problem of optimal investment and consumption with proportional transaction costs in continuous-time regime-switching models. An investor distributes his/her wealth between a stock and a bond and consumes at a non-negative rate from the bond account. The market parameters (the interest rate, the appreciation rate, and the volatility rate of the stock) are assumed to depend on a continuous-time Markov chain with a finite number of states (also known as regimes). The objective of the optimization problem is to maximize the expected discounted total utility of consumption. We first show that for a class of hyperbolic absolute risk aversion utility functions, the value function is a viscosity solution of the Hamilton–Jacobi–Bellman equation associated with the optimization problem. We then treat a power utility function and generalize the existing results to the regime-switching case.

Keywords: Optimal investment and consumption problem; Transaction cost; Regime-switching model; Hamilton-Jacobi-Bellman equation; Power utility (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10957-013-0445-y

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