Portfolio-Consumption Choice with Information Cost

doi:10.1007/s40305-023-00472-6

Abstract

Abstract: This paper studies an optimal portfolio-consumption choice with information cost. In financial market, investors collect market information to understand the market parameters,make reasonable investment and consumption choice while controlling risks, and finally gain utility. Information acquisition and portfolio-consumption choice are two important steps of investment behavior, which are a whole. Nevertheless, the existing literature usually only considers the cost of information acquisition or only considers portfolio-consumption choice. In order to study the overall behavior of investors in financial market, these two issues are considered together in this paper. Firstly, based on portfolio-consumption choice model in ambiguity market, a bilevel optimization problem is established to discuss how investors should acquire information and make investment-consumption strategies to maximize their comprehensive utilities. Then, the inner stochastic game problem with constraints is simplified into finding saddle point of a function, and the value function of game problem is provided via the function value at the saddle point, so that the objective function of the outer optimization problem can be represented as a non-convex and non-concave binary function. At last, the existence condition and the range of the optimal strategy are presented, and the sensitivity analysis is studied.

Key words: Portfolio-consumption choice, Bilevel optimization problem, Information cost, Market ambiguity

CLC Number:

Zhou Yang, Rui-Feng Mai, Man-Ni Lv. Portfolio-Consumption Choice with Information Cost[J]. Journal of the Operations Research Society of China, 2025, 13(1): 184-209.

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