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OPTIMAL CONSUMPTION AND INVESTMENT FOR A LARGE INVESTOR: AN INTENSITY-BASED CONTROL FRAMEWORK

Authors


  • Michael Busch and Ralf Korn gratefully acknowledge financial support by the project “Alternative Investments” of the Bundesministerium für Bildung und Forschung. Frank Seifried gratefully acknowledges financial support by the Rheinland-Pfalz Cluster of Excellence “Dependable Adaptive Systems and Mathematical Modeling.”

Frank Seifried, Department of Mathematics, University of Kaiserslautern, 67653 Kaiserslautern, Germany; e-mail: seifried@mathematik.uni-kl.de.

Abstract

We introduce a new stochastic control framework where in addition to controlling the local coefficients of a jump-diffusion process, it is also possible to control the intensity of switching from one state of the environment to the other. Building upon this framework, we develop a large investor model for optimal consumption and investment that generalizes the regime-switching approach of Bäuerle and Rieder (2004).

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