Investment/consumption problem in illiquid markets with regime-switching

DOI10.1137/120876976MaRDI QIDQ3192141zbMATH OpenOpenAlexFDO

Authors Huyên Pham, Paul Gassiat, Fausto Gozzi

Publication date 26 September 2014

Published in SIAM Journal on Control and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1107.4210

zbMATH Keywords

Markov chainoptimal consumptionstochastic controlviscosity solutionsdynamic programming methodregime-switching modelsliquidity effectsintegro-partial differential system

Mathematics Subject Classification ID

Auctions, bargaining, bidding and selling, and other market models (91B26) Integro-partial differential equations (35R09) Existence of optimal solutions to problems involving randomness (49J55) Optimality conditions for problems involving relations other than differential equations (49K21) Optimality conditions for problems involving randomness (49K45) Dynamic programming in optimal control and differential games (49L20) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: We consider an illiquid financial market with different regimes modeled by a continuous-time finite-state Markov chain. The investor can trade a stock only at the discrete arrival times of a Cox process with intensity depending on the market regime. Moreover, the risky asset price is subject to liquidity shocks, which change its rate of return and volatility, and induce jumps on its dynamics. In this setting, we study the problem of an economic agent optimizing her expected utility from consumption under a non-bankruptcy constraint. By using the dynamic programming method, we provide the characterization of the value function of this stochastic control problem in terms of the unique viscosity solution to a system of integro-partial differential equations. We next focus on the popular case of CRRA utility functions, for which we can prove smoothness $C^2$ results for the value function. As an important byproduct, this allows us to get the existence of optimal investment/consumption strategies characterized in feedback forms. We analyze a convergent numerical scheme for the resolution to our stochastic control problem, and we illustrate finally with some numerical experiments the effects of liquidity regimes in the investor's optimal decision.

Recommendations

• Dynamic programming for an investmentćonsumption problem in illiquid markets with regime-switching
• Investment/consumption choice in illiquid markets with random trading times
• Optimal consumption policies in illiquid markets
• Optimal consumption and investment with liquid and illiquid assets
• A model of optimal consumption under liquidity risk with random trading times

Cited in

(24)

• A coupled system of integrodifferential equations arising in liquidity risk model
• Pre-commitment and equilibrium investment strategies for the DC pension plan with regime switching and a return of premiums clause
• Optimal consumption and investment strategies with liquidity risk and lifetime uncertainty for Markov regime-switching jump diffusion models
• Robust optimization of credit portfolios
• Optimal consumption policies in illiquid markets
• Equilibrium investment strategy for multi-period DC pension funds with stochastic interest rate and regime switching
• Stochastic impulse control with regime-switching dynamics
• Dynamic programming for an investmentćonsumption problem in illiquid markets with regime-switching
• Optimal liquidation in a finite time regime switching model with permanent and temporary pricing impact
• A model of optimal consumption under liquidity risk with random trading times
• Optimal market dealing under constraints
• Investment with restricted stock and the value of information
• Utility maximization in an illiquid market in continuous time
• Expected power-utility maximization under incomplete information and with Cox-process observations
• Impact of time illiquidity in a mixed market without full observation
• Solutions for Poissonian stopping problems of linear diffusions via extremal processes
• Optimal investment-consumption strategy under inflation in a Markovian regime-switching market
• Expected log-utility maximization under incomplete information and with Cox-process observations
• EXPLICIT SOLUTIONS OF CONSUMPTION-INVESTMENT PROBLEMS IN FINANCIAL MARKETS WITH REGIME SWITCHING
• Optimal investment under information driven contagious distress
• Investment/consumption choice in illiquid markets with random trading times
• Optimal portfolio and consumption for a Markovian regime-switching jump-diffusion process
• Optimal investment in an illiquid market with search frictions and transaction costs
• Viscosity characterization of the value function of an investment-consumption problem in presence of an illiquid asset

This page was built for publication: Investment/consumption problem in illiquid markets with regime-switching

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q3192141)