Martingale approach to optimal portfolio-consumption problems in Markov-modulated pure-jump models

Oscar Lopez and Rafael Serrano ()

Papers from arXiv.org

Abstract: We study optimal investment strategies that maximize expected utility from consumption and terminal wealth in a pure-jump asset price model with Markov-modulated (regime switching) jump-size distributions. We give sufficient conditions for existence of optimal policies and find closed-form expressions for the optimal value function for agents with logarithmic and fractional power (CRRA) utility in the case of two-state Markov chains. The main tools are convex duality techniques, stochastic calculus for pure-jump processes and explicit formulae for the moments of telegraph processes with Markov-modulated random jumps.

Date: 2014-06
New Economics Papers: this item is included in nep-upt
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