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Journal of the Nigerian Association of Mathematical Physics

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An Optimal Stochastic Investment and Consumption Strategy with Log Utility

AC Okoroafor, EE Okereke

Abstract


This paper considers a single investor who owns a production plant that generates units of consumption goods in a capitalist economy. The goal is to choose optimal investment and consumption policies that maximize the finite horizon expected discounted logarithmic utility of consumption and terminal wealth. A dynamical programming principle is used to derive the optimal investment and consumption strategy when the state variable follows a meanreverting square root process.

Keywords: Mean-reverting square root process, Control process, Optimal Strategies, Dynamic Programming Principle




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