Utility maximization with addictive consumption habit formation in incomplete semimartingale markets

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5 Citations (Scopus)

Abstract

This paper studies the continuous time utility maximization problem on consumption with addictive habit formation in incomplete semimartingale markets. Introducing the set of auxiliary state processes and the modified dual space, we embed our original problem into a time-separable utility maximization problem with a shadow random endowment on the product space L+0 (Ω ×[0 T]O, ℙ¯). Existence and uniqueness of the optimal solution are established using convex duality approach, where the primal value function is defined on two variables, that is, the initial wealth and the initial standard of living. We also provide sufficient conditions on the stochastic discounting processes and on the utility function for the well-posedness of the original optimization problem. Under the same assumptions, classical proofs in the approach of convex duality analysis can be modified when the auxiliary dual process is not necessarily integrable.
Original languageEnglish
Pages (from-to)1383-1419
Number of pages37
JournalAnnals of Applied Probability
Volume25
Issue number3
DOIs
Publication statusPublished - 1 Jan 2015
Externally publishedYes

Keywords

  • Auxiliary processes
  • Consumption habit formation
  • Convex duality
  • Incomplete markets
  • Time nonseparable utility maximization

ASJC Scopus subject areas

  • Statistics and Probability
  • Statistics, Probability and Uncertainty

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