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Optimal consumption and portfolio in a jump diffusion market

Framstad, Nils Christian; Øksendal, Bernt; Sulem, Agnès
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URI
http://hdl.handle.net/11250/163833
Date
2001-06
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  • Discussion papers (FOR) [509]
Abstract
We consider the problem of optimal consumption and portfolio in a jump diffusion market consisting of a bank account and a stock, whose price is modeled by a geometric Lévy process. We show that in the absence of transaction costs, the solution in the jump diffusion case has the same form as in the pure diffusion case solved by Merton [M]. In particular, the optimal portfolio is to keep a constant fraction of wealth invested in the stock. This constant is smaller than the corresponding optimal fraction in the pure diffusion case.
Description
Revised version - June 29, 2001
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
1999:5

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