Smoothness of the Value Function for Optimal Consumption Model with Consumption-Wealth Utility and Borrowing Constraint
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Publication:6412754
arXiv2210.01016MaRDI QIDQ6412754FDOQ6412754
Authors: Weidong Tian, Z. M. Zhu 
Publication date: 3 October 2022
Abstract: This paper considers an optimal consumption-investment problem for an investor whose instantaneous utility depends on both consumption and wealth. The investor faces a constraint that the investment amount in the risky asset does not exceed an exogenous function of the wealth. We prove that the value function is second-order smooth, and the optimal consumption-investment policy is provided in a feedback form. Moreover, when the risky investment amount is bounded by a fixed constant, we show that under certain conditions, the constraint is binding if and only if an endogenous threshold bounds the portfolio wealth. Our results encompass many well-developed portfolio choice models and imply new applications.
Portfolio theory (91G10) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Financial applications of other theories (91G80)
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