We investigate optimal consumption policies in the liquidity risk model introduced by Pham and Tankov (Math. Finance 18:613-627, 2008). Our main result is to derive smoothness C-1 results for the value functions of the portfolio/consumption choice problem. As an important consequence, we can prove the existence of the optimal control (portfolio/consumption strategy) which we characterize both in feedback form in terms of the derivatives of the value functions and as the solution of a second-order ODE. Finally, numerical illustrations of the behavior of optimal consumption strategies between two trading dates are given.
Optimal consumption policies in illiquid markets
Cretarola A.;
2011-01-01
Abstract
We investigate optimal consumption policies in the liquidity risk model introduced by Pham and Tankov (Math. Finance 18:613-627, 2008). Our main result is to derive smoothness C-1 results for the value functions of the portfolio/consumption choice problem. As an important consequence, we can prove the existence of the optimal control (portfolio/consumption strategy) which we characterize both in feedback form in terms of the derivatives of the value functions and as the solution of a second-order ODE. Finally, numerical illustrations of the behavior of optimal consumption strategies between two trading dates are given.File in questo prodotto:
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