Optimal investment and consumption in a Black--Scholes market with Lévy-driven stochastic coefficients

Economy – Quantitative Finance – Pricing of Securities

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Published in at http://dx.doi.org/10.1214/07-AAP475 the Annals of Applied Probability (http://www.imstat.org/aap/) by the Inst

Scientific paper

10.1214/07-AAP475

In this paper, we investigate an optimal investment and consumption problem for an investor who trades in a Black--Scholes financial market with stochastic coefficients driven by a non-Gaussian Ornstein--Uhlenbeck process. We assume that an agent makes investment and consumption decisions based on a power utility function. By applying the usual separation method in the variables, we are faced with the problem of solving a nonlinear (semilinear) first-order partial integro-differential equation. A candidate solution is derived via the Feynman--Kac representation. By using the properties of an operator defined in a suitable function space, we prove uniqueness and smoothness of the solution. Optimality is verified by applying a classical verification theorem.

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