Optimal entry and consumption under habit formation

DOI10.1017/APR.2021.37zbMATH Open1489.91243arXiv1903.04257OpenAlexW3005715921MaRDI QIDQ5084791FDOQ5084791

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Publication date: 28 June 2022

Published in: Advances in Applied Probability (Search for Journal in Brave)

Abstract: This paper studies a composite problem involving the decision making of the optimal entry time and dynamic consumption afterwards. In stage-1, the investor has access to full market information subjecting to some information costs and needs to choose an optimal stopping time to initiate stage-2; in stage-2, the investor terminates the costly full information acquisition and starts dynamic investment and consumption under partial observations of free public stock prices. The habit formation preference is employed, in which the past consumption affects the investor's current decisions. By using the stochastic Perron's method, the value function of the composite problem is proved to be the unique viscosity solution of some variational inequalities.

Full work available at URL: https://arxiv.org/abs/1903.04257

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zbMATH Keywords

viscosity solutionstochastic Perron methodconsumption habit formationoptimal entry problem

Mathematics Subject Classification ID

Filtering in stochastic control theory (93E11) Portfolio theory (91G10) Dynamic programming in optimal control and differential games (49L20) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Optimal stochastic control (93E20)

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Cited In (7)

• Utility maximization with habit formation of interaction
• Optimal consumption and life insurance under shortfall aversion and a drawdown constraint
• On the concavity of consumption function under habit formation
• A mean field game approach to equilibrium consumption under external habit formation
• Optimal consumption dynamics with non-concave habit-forming utility
• Habit formation and the Pareto-efficient provision of public goods
• Optimal consumption with loss aversion and reference to past spending maximum

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