Optimal consumption under habit formation in markets with transaction costs and random endowments

DOI10.1214/16-AAP1222zbMATH Open1368.91168arXiv1408.1382OpenAlexW2962719767MaRDI QIDQ2013576FDOQ2013576

Xiang Yu

Publication date: 8 August 2017

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: This paper studies the optimal consumption under the addictive habit formation preference in markets with transaction costs and unbounded random endowments. To model the proportional transaction costs, we adopt the Kabanov's multi-asset framework with a cash account. At the terminal time T, the investor can receive unbounded random endowments for which we propose a new definition of acceptable portfolios based on the strictly consistent price system (SCPS). We prove a type of super-hedging theorem using the acceptable portfolios which enables us to obtain the consumption budget constraint condition under market frictions. Applying the path dependence reduction and the embedding approach, we obtain the existence and uniqueness of the optimal consumption using some auxiliary processes and the duality analysis. As an application of the duality theory, the market isomorphism with special discounting factors is also discussed in the sense that the original optimal consumption with habit formation is equivalent to the standard optimal consumption problem without the habits impact, however, in a modified isomorphic market model.

Full work available at URL: https://arxiv.org/abs/1408.1382

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zbMATH Keywords

convex dualityproportional transaction costsacceptable portfoliosconsumption budget constraintconsumption habit formationmarket isomorphismunbounded random endowments

Mathematics Subject Classification ID

Portfolio theory (91G10) Martingales with continuous parameter (60G44) Actuarial science and mathematical finance (91G99)

Cited In (15)

• Utility maximization problem with transaction costs: optimal dual processes and stability
• Optimal consumption with reference to past spending maximum
• Optimal entry and consumption under habit formation
• Optimal consumption and life insurance under shortfall aversion and a drawdown constraint
• Investment-consumption-insurance optimisation problem with multiple habit formation and non-exponential discounting
• Utility Maximization with Proportional Transaction Costs Under Model Uncertainty
• A mean field game approach to equilibrium consumption under external habit formation
• Optimal consumption dynamics with non-concave habit-forming utility
• A greedy algorithm for habit formation under multiplicative utility
• Optimal consumption with loss aversion and reference to past spending maximum
• Time-inconsistent stopping, myopic adjustment and equilibrium stability: with a mean-variance application
• Optimal investment with random endowments and transaction costs: duality theory and shadow prices
• Time-consistent consumption-portfolio control problems with regime-switching-modulated habit formation: an essentially cooperative approach
• Utility Maximization with Habit Formation: Dynamic Programming and Stochastic PDEs
• Controlled ordinary differential equations with random path-dependent coefficients and stochastic path-dependent Hamilton-Jacobi equations

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