Finite-Horizon Optimal Consumption and Investment with Upper and Lower Constraints on Consumption

Research output: Contribution to journalArticlepeer-review

Abstract

We study a finite-horizon optimal consumption and investment problem in a complete continuous-time market where consumption is restricted within fixed upper and lower bounds. Assuming constant relative risk aversion (CRRA) preferences, we employ the dual-martingale approach to reformulate the problem and derive closed-form integral representations for the dual value function and its derivatives. These results yield explicit feedback formulas for the optimal consumption, portfolio allocation, and wealth processes. We establish the duality theorem linking the primal and dual value functions and verify the regularity and convexity properties of the dual solution. Our results show that the upper and lower consumption bounds transform the linear Merton rule into a piecewise policy: consumption equals L when wealth is low, follows the unconstrained Merton ratio in the interior region, and is capped at H when wealth is high.

Original languageEnglish
Article number3598
JournalMathematics
Volume13
Issue number22
DOIs
StatePublished - Nov 2025

Keywords

  • consumption constraints
  • CRRA utility
  • duality
  • finite-horizon optimization
  • martingale approach
  • optimal investment

Fingerprint

Dive into the research topics of 'Finite-Horizon Optimal Consumption and Investment with Upper and Lower Constraints on Consumption'. Together they form a unique fingerprint.

Cite this