Optimal investment and consumption with stochastic factor and delay

L. Li, Hui Mi

Abstract


We analyse an optimal portfolio and consumption problem with stochastic factor and delay over a finite time horizon. The financial market includes a risk-free asset, a risky asset and a stochastic factor. The price process of the risky asset is modelled as a stochastic differential delay equation whose coefficients vary according to the stochastic factor; the drift also depends on its historical performance. Employing the stochastic dynamic programming approach, we establish the associated Hamilton–Jacobi–Bellman equation. Then we solve the optimal investment and consumption strategies for the power utility function. We also consider a special case in which the price process of the stochastic factor degenerates into a Cox–Ingersoll–Ross model. Finally, the effects of the delay variable on the optimal strategies are discussed and some numerical examples are presented to illustrate the results.


doi:10.1017/S1446181119000014

Keywords


stochastic differential delay equation, power utility function, stochastic factor, Cox-Ingersoll-Ross model.



DOI: http://dx.doi.org/10.21914/anziamj.v61i0.13011



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ANZIAM Journal, ISSN 1446-8735, copyright Australian Mathematical Society.