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The Impact of Consumption on an Investor’s Strategy under Stochastic Interest Rate and Correlating Brownian Motions | Chapter 02 | Advances in Mathematics and Computer Science Vol. 4

In this work, we consider that an investor’s portfolio comprises of two assets- a risk-free asset driven by Ornstein-Uhlenbeck Stochastic interest rate of return model and the second asset a risky stock with a price process governed by the geometric Brownian motion. It is also considered that there are withdrawals for consumption and taxes, transaction costs and dividends are in involved. The aim was to investigate the effect of consumption on an investor’s trading strategy under correlating Brownian motions. The relating Hamilton-Jacobi-Bellman (HJB) equation was obtained using maximum principle. The application of elimination of variable dependency gave the optimal investment strategy for the investor’s problem. Among the findings is that more fund should be made available for investment on the risky asset when there is consumption to keep the investor solvent.

Author(s) Details

Silas A. Ihedioha
Department of Mathematics, Plateau State University Bokkos, P.M.B. 2012, Jos, Plateau State, Nigeria.

Ubani, Sunday Iheanyi
Federal College of Agriculture, Ishiagu, Ebonyi State, Nigeria.

Njoku, Iheanyi Odochi
Federal College of Agriculture, Ishiagu, Ebonyi State, Nigeria.

View Volume: http://bp.bookpi.org/index.php/bpi/catalog/book/97
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