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Optimal investment and consumption with stochastic dividends

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  • Xikui Wang
  • Yan Wang

Abstract

We use the statistical model of bandit processes to formulate and solve two kinds of optimal investment and consumption problems. The payoffs from the investment are dividend payments with fixed return rates, but the payment frequency is stochastic following a Poisson distribution. The financial market consists of assets which follow Poisson distributions with known or unknown intensity rates. Two kinds of consumption patterns are defined and the optimality of the myopic strategy, the Gittins index strategy, and the play‐the‐winner strategy are discussed. Copyright © 2009 John Wiley & Sons, Ltd.

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  • Xikui Wang & Yan Wang, 2010. "Optimal investment and consumption with stochastic dividends," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 26(6), pages 792-808, November.
    • Handle: RePEc:wly:apsmbi:v:26:y:2010:i:6:p:792-808
    DOI: 10.1002/asmb.823
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    Cited by:

    1. You Liang & Xikui Wang & Yanqing Yi, 2013. "One-armed bandit process with a covariate," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 65(5), pages 993-1006, October.

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