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Research Article Open access CC BY 4.0

Investor’s Power Utility Optimization with Consumption, Tax, Dividend and Transaction Cost under Constant Elasticity of Variance Model

Silas A. Ihedioha

Asian Research Journal of Mathematics · pp. 1–12 · Published 20 May 2017

10.9734/ARJOM/2017/33425

Abstract

This work considered an investor’s portfolio where consumption, taxes, transaction costs and dividends are in involved, under constant elasticity of variance (CEV). The stock price is assumed to be governed by a constant elasticity of variance CEV model and the goal is to maximize the expected utility of consumption and terminal wealth where the investor has a power utility preference. The application of dynamic programming principles, specifically the maximum principle obtained the Hamilton-Jacobi-Bellman (HJB) equation for the value function on which elimination of variable dependency was applied to obtain the close form solution of the optimal investment and consumption strategies. It is found that optimal investment on the risky asset is horizon dependent.

Investor power utility consumption transaction costs constant elasticity of variance optimization.

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Cited by 3

Optimal investment and consumption decision for an investor with Ornstein-Uhlenbeck Stochastic interest rate model through utility maximization

S. Ihedioha · PROCEEDINGS OF THE INTERNATIONAL CONFERENCE ON MATHEMATICAL SCIENCES AND TECHNOLOGY 2018 (MATHTECH2018): Innovative Technologies for Mathematics & Mathematics for Technological Innovation · 2019

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