Optimal consumption under a drawdown constraint over a finite horizon
Fuente:
arXiv
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| Autores principales: | , , , |
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| Formato: | Preprint |
| Publicado: |
2022
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| Acceso en línea: | |
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| _version_ | 1866912100780081152 |
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| author | Chen, Xiaoshan Li, Xun Yi, Fahuai Yu, Xiang |
| author_facet | Chen, Xiaoshan Li, Xun Yi, Fahuai Yu, Xiang |
| contents | This paper studies a finite horizon utility maximization problem on excessive consumption under a drawdown constraint. Our control problem is an extension of the one considered in Bahman et al. (2019) to the model with a finite horizon and an extension of the one considered in Jeon and Oh (2022) to the model with zero interest rate. Contrary to Bahman et al. (2019), we encounter a parabolic nonlinear HJB variational inequality with a gradient constraint, in which some time-dependent free boundaries complicate the analysis significantly. Meanwhile, our methodology is built on technical PDE arguments, which differs from the martingale approach in Jeon and Oh (2022). Using the dual transform and considering the auxiliary variational inequality with gradient and function constraints, we establish the existence and uniqueness of the classical solution to the HJB variational inequality after the dimension reduction, and the associated free boundaries can be characterized in analytical form. Consequently, the piecewise optimal feedback controls and the time-dependent thresholds for the ratio of wealth and historical consumption peak can be obtained. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2207_07848 |
| institution | arXiv |
| publishDate | 2022 |
| record_format | arxiv |
| spellingShingle | Optimal consumption under a drawdown constraint over a finite horizon Chen, Xiaoshan Li, Xun Yi, Fahuai Yu, Xiang Optimization and Control Mathematical Finance This paper studies a finite horizon utility maximization problem on excessive consumption under a drawdown constraint. Our control problem is an extension of the one considered in Bahman et al. (2019) to the model with a finite horizon and an extension of the one considered in Jeon and Oh (2022) to the model with zero interest rate. Contrary to Bahman et al. (2019), we encounter a parabolic nonlinear HJB variational inequality with a gradient constraint, in which some time-dependent free boundaries complicate the analysis significantly. Meanwhile, our methodology is built on technical PDE arguments, which differs from the martingale approach in Jeon and Oh (2022). Using the dual transform and considering the auxiliary variational inequality with gradient and function constraints, we establish the existence and uniqueness of the classical solution to the HJB variational inequality after the dimension reduction, and the associated free boundaries can be characterized in analytical form. Consequently, the piecewise optimal feedback controls and the time-dependent thresholds for the ratio of wealth and historical consumption peak can be obtained. |
| title | Optimal consumption under a drawdown constraint over a finite horizon |
| topic | Optimization and Control Mathematical Finance |
| url | https://arxiv.org/abs/2207.07848 |