TY - JOUR
T1 - Optimal portfolio and consumption with habit formation in a jump diffusion market
AU - Ruan, Xinfeng
AU - Zhu, Wenli
AU - Hu, Jin
AU - Huang, Jiexiang
N1 - Funding Information:
This work is supported by the Fundamental Research Funds for the Central Universities ( JBK130401 ).
PY - 2013
Y1 - 2013
N2 - This paper studies optimal portfolio and consumption selection with habit formation in a jump diffusions incomplete market in continuous-time. The stochastic maximum principle for jump processes is applied to solve habit-forming utility maximization problem. We transform this problem into the case not involving habit formation in mechanically. Then the solution in the state feedback form is given. The relationship between maximum principle and dynamic programming is employed to get the expression of the relative risk aversion (RRA) coefficient and its distribution. Finally, for a special case, the stationary mean of the RRA coefficient is obtained and the numerical experiment indicates our model with jump diffusions is better than the model in [1] to resolve the equity premium puzzle in a way.
AB - This paper studies optimal portfolio and consumption selection with habit formation in a jump diffusions incomplete market in continuous-time. The stochastic maximum principle for jump processes is applied to solve habit-forming utility maximization problem. We transform this problem into the case not involving habit formation in mechanically. Then the solution in the state feedback form is given. The relationship between maximum principle and dynamic programming is employed to get the expression of the relative risk aversion (RRA) coefficient and its distribution. Finally, for a special case, the stationary mean of the RRA coefficient is obtained and the numerical experiment indicates our model with jump diffusions is better than the model in [1] to resolve the equity premium puzzle in a way.
KW - Equity premium puzzle
KW - Habit formation
KW - Jump diffusions market
KW - Portfolio and consumption
KW - Stochastic control
KW - The maximum principle
UR - http://www.scopus.com/inward/record.url?scp=84883028250&partnerID=8YFLogxK
U2 - 10.1016/j.amc.2013.07.063
DO - 10.1016/j.amc.2013.07.063
M3 - Article
AN - SCOPUS:84883028250
SN - 0096-3003
VL - 222
SP - 391
EP - 401
JO - Applied Mathematics and Computation
JF - Applied Mathematics and Computation
ER -