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Keywords:

  • Bandit processes;
  • Bayesian framework;
  • Poisson distribution;
  • portfolio optimization

Abstract

We use the statistical model of bandit processes to formulate and solve two kinds of optimal investment and consumption problems. The payoffs from the investment are dividend payments with fixed return rates, but the payment frequency is stochastic following a Poisson distribution. The financial market consists of assets which follow Poisson distributions with known or unknown intensity rates. Two kinds of consumption patterns are defined and the optimality of the myopic strategy, the Gittins index strategy, and the play-the-winner strategy are discussed. Copyright © 2009 John Wiley & Sons, Ltd.