An Investment and Consumption Problem with CIR Interest Rate and Stochastic Volatility

• Main Authors: Hao Chang, Xi-min Rong
• Format: Article
• Language: English
• Published: Hindawi Limited 2013-01-01
• Series: Abstract and Applied Analysis
• Online Access: http://dx.doi.org/10.1155/2013/219397

We are concerned with an investment and consumption problem with stochastic interest rate and stochastic volatility, in which interest rate dynamic is described by the Cox-Ingersoll-Ross (CIR) model and the volatility of the stock is driven by Heston’s stochastic volatility model. We apply stochastic optimal control theory to obtain the Hamilton-Jacobi-Bellman (HJB) equation for the value function and choose power utility and logarithm utility for our analysis. By using separate variable approach and variable change technique, we obtain the closed-form expressions of the optimal investment and consumption strategy. A numerical example is given to illustrate our results and to analyze the effect of market parameters on the optimal investment and consumption strategies.