Optimal consumption policies in illiquid markets

DOI10.1007/S00780-010-0123-YzbMATH Open1303.91154arXiv0807.0326OpenAlexW2014889318MaRDI QIDQ483699FDOQ483699

Authors: Alessandra Cretarola, Huyên Pham, Peter Tankov, Fausto Gozzi 

Publication date: 17 December 2014

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: We investigate optimal consumption policies in the liquidity risk model introduced in Pham and Tankov (2007). Our main result is to derive smoothness results for the value functions of the portfolio/consumption choice problem. As an important consequence, we can prove the existence of the optimal control (portfolio/consumption strategy) which we characterize both in feedback form in terms of the derivatives of the value functions and as the solution of a second-order ODE. Finally, numerical illustrations of the behavior of optimal consumption strategies between two trading dates are given.

Full work available at URL: https://arxiv.org/abs/0807.0326

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zbMATH Keywords

optimal consumptionoptimal controlviscosity solutionsintegrodifferential equationssemiconcavityilliquid marketsub/superdifferentials

Mathematics Subject Classification ID

Portfolio theory (91G10) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Applications of optimal control and differential games (49N90) Optimal stochastic control (93E20)

Cites Work

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Cited In (16)

• A coupled system of integrodifferential equations arising in liquidity risk model
• Title not available (Why is that?)
• Mean-variance portfolio selection in presence of infrequently traded stocks
• Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods
• A model of optimal consumption under liquidity risk with random trading times
• Optimal consumption/investment problem with light stocks: a mixed continuous-discrete time approach
• Optimal consumption and investment with liquid and illiquid assets
• Optimal allocation–consumption problem for a portfolio with an illiquid asset
• Optimal asset allocation with restrictions on liquidity
• Impact of time illiquidity in a mixed market without full observation
• Investment/consumption problem in illiquid markets with regime-switching
• Investment/consumption choice in illiquid markets with random trading times
• 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
• Optimal stopping problems in Lévy models with random observations
• Optimal consumption under uncertainty, liquidity constraints, and bounded rationality

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