Consumption-Investment Problem with Transaction Costs for L\'evy-Driven Price Processes

TL;DR

This paper studies an optimal control problem in financial markets with transaction costs and Levy-driven asset prices, proving the Bellman function's viscosity solution and establishing uniqueness and the Dynamic Programming Principle.

Contribution

It introduces a framework for consumption-investment problems with Levy processes and transaction costs, proving the Bellman function's viscosity solution and a uniqueness theorem.

Findings

Bellman function is a viscosity solution of the HJB equation.

Established a uniqueness theorem for the viscosity solution.

Analyzed the Dynamic Programming Principle in this context.

Abstract

We consider an optimal control problem for a linear stochastic integro-diffe\-rential equation with conic constraints on the phase variable and the control of singular-regular type. Our setting includes consumption-investment problems for models of financial markets in the presence of proportional transaction costs where the price of the assets are given by a geometric L\'evy process and the investor is allowed to take short positions. We prove that the Bellman function of the problem is a viscosity solution of the HJB equation. A uniqueness theorem for the solution of the latter is established. Special attention is paid to the Dynamic Programming Principle.