Optimal investment and consumption in a continuous-time co-integration model

Yang Shen*, Tak Kuen Siu

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

This paper discusses an optimal investment-consumption problem in a continuous-time co-integration model, where an investor aims to maximize an expected, discounted utility derived from intertemporal consumption and terminal wealth in a finite time horizon. Using the dynamic programming principle approach, we obtain an Hamilton-Jacobi-Bellman equation related to the problem. In each of the power and logarithmic utility cases, we obtain semi-closed-form expressions of the investment-consumption strategy and the value function. We also provide some numerical examples to illustrate these theoretical results.

Original languageEnglish
Pages (from-to)501-530
Number of pages30
JournalIMA Journal of Management Mathematics
Volume28
Issue number4
DOIs
Publication statusPublished - Oct 2017

Keywords

  • investment-consumption
  • co-integration
  • Feynman-Kac formula
  • Riccati equation

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