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| Main Authors: | , |
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| Format: | Preprint |
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2026
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| Online Access: | https://arxiv.org/abs/2603.02820 |
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| _version_ | 1866912961048608768 |
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| author | Ferrari, Giorgio Schütz, Tim Niclas |
| author_facet | Ferrari, Giorgio Schütz, Tim Niclas |
| contents | In this paper, we study an intertemporal utility maximization problem in which an investor chooses consumption and portfolio strategies in the presence of a stochastic factor and a no-borrowing constraint. In the spirit of the Kim-Omberg model, the stochastic factor represents the expected excess return of the risky asset. It is perfectly negatively correlated with shocks to the risky asset, and follows an Ornstein-Uhlenbeck process, thereby capturing the mean reversion of expected excess returns-a feature well supported by empirical evidence in financial markets. The investor seeks to maximize expected utility from consumption, subject to the constraint that wealth remains nonnegative at all times. To address the dynamic no-borrowing constraint, we use Lagrange duality to transform the primal problem into a singular control problem in the dual space. We then characterize the solution to the dual singular control problem via an auxiliary two-dimensional optimal stopping problem featuring stochastic volatility, and subsequently retrieve the primal value function as well as the optimal portfolio and consumption plans. Finally, a numerical study is conducted to derive economic and financial implications. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2603_02820 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Optimal Consumption and Portfolio Choice with No-Borrowing Constraint in the Kim-Omberg Model: The Complete Market Case Ferrari, Giorgio Schütz, Tim Niclas Optimization and Control Probability Mathematical Finance In this paper, we study an intertemporal utility maximization problem in which an investor chooses consumption and portfolio strategies in the presence of a stochastic factor and a no-borrowing constraint. In the spirit of the Kim-Omberg model, the stochastic factor represents the expected excess return of the risky asset. It is perfectly negatively correlated with shocks to the risky asset, and follows an Ornstein-Uhlenbeck process, thereby capturing the mean reversion of expected excess returns-a feature well supported by empirical evidence in financial markets. The investor seeks to maximize expected utility from consumption, subject to the constraint that wealth remains nonnegative at all times. To address the dynamic no-borrowing constraint, we use Lagrange duality to transform the primal problem into a singular control problem in the dual space. We then characterize the solution to the dual singular control problem via an auxiliary two-dimensional optimal stopping problem featuring stochastic volatility, and subsequently retrieve the primal value function as well as the optimal portfolio and consumption plans. Finally, a numerical study is conducted to derive economic and financial implications. |
| title | Optimal Consumption and Portfolio Choice with No-Borrowing Constraint in the Kim-Omberg Model: The Complete Market Case |
| topic | Optimization and Control Probability Mathematical Finance |
| url | https://arxiv.org/abs/2603.02820 |