Consumption-Investment Problem with Subsistence Consumption, Bankruptcy, and Random Market Coefficients

A. Cadenillas and Suresh Sethi
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A. Cadenillas: University of Alberta

Journal of Optimization Theory and Applications, 1997, vol. 93, issue 2, No 1, 243-272

Abstract: Abstract We consider a general continuous-time finite-horizon single-agent consumption and portfolio decision problem with subsistence consumption and value of bankruptcy. Our analysis allows for random market coefficients and general continuously differentiable concave utility functions. We study the time of bankruptcy as a problem of optimal stopping, and succeed in obtaining explicit formulas for the optimal consumption and wealth processes in terms of the optimal bankruptcy time. This paper extends the results of Karatzas, Lehoczky, and Shreve (Ref. 1) on the maximization of expected utility from consumption in a financial market with random coefficients by incorporating subsistence consumption and bankruptcy. It also addresses the random coefficients and finite-horizon version of the problem treated by Sethi, Taksar, and Presman (Ref. 2). The mathematical tools used in our analysis are optimal stopping, stochastic control, martingale theory, and Girsanov change of measure.

Keywords: Consumption-investment problem; stopping time; utility function; stochastic control; martingale representation theorem; change of probability measure (search for similar items in EconPapers)
Date: 1997
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DOI: 10.1023/A:1022640321499

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