Optimal Consumption-Investment with Epstein-Zin Utility under Leverage Constraint

We study optimal portfolio choice under Epstein-Zin recursive utility in the presence of general leverage constraints. We first establish that the optimal value function is the unique viscosity solution to the associated Hamilton-Jacobi-Bellman (HJB) equation, by developing a new dynamic programming principle under constraints. We further demonstrate that the value function admits smoothness and characterize the optimal consumption and investment strategies. In addition, we derive explicit solutions for the optimal strategy and explicitly delineate the constrained and unconstrained regions in several special cases of the leverage constraint. Finally, we conduct a comparative analysis, highlighting the differences relative to the classical time-separable preferences and to the setting without leverage constraints.

Publication Details

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ArXiv.org
Published
2025-09-26
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Agriculture, Water, and Health
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article
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article

Optimal Consumption-Investment with Epstein-Zin Utility under Leverage Constraint

ArXiv.org
Agriculture, Water, and Health
article

Optimal Consumption-Investment with Epstein-Zin Utility under Leverage Constraint

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Abstract

We study optimal portfolio choice under Epstein-Zin recursive utility in the presence of general leverage constraints. We first establish that the optimal value function is the unique viscosity solution to the associated Hamilton-Jacobi-Bellman (HJB) equation, by developing a new dynamic programming principle under constraints. We further demonstrate that the value function admits smoothness and characterize the optimal consumption and investment strategies. In addition, we derive explicit solutions for the optimal strategy and explicitly delineate the constrained and unconstrained regions in several special cases of the leverage constraint. Finally, we conduct a comparative analysis, highlighting the differences relative to the classical time-separable preferences and to the setting without leverage constraints.

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Agriculture, Water, and Health
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Optimal Consumption-Investment with Epstein-Zin Utility under Leverage Constraint · ArXiv.org (2025) | TGRS Research Map | TGRS