Consumption-investment under alternative stochastic-integral conventions

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Authors: Mario Ayala, Benjamín Vallejo Jiménez
Cited by: 0

Abstract

We study the Merton consumption-investment problem when risky asset dynamics are written under stochastic-integral conventions indexed by $α$, interpolating between the Itô ($α=0$), Stratonovich ($α=1/2$), and Hänggi-Klimontovich ($α=1$) conventions. Transforming the drift jointly with the convention leaves the optimal policy unchanged; holding the drift coefficient numerically fixed changes the investor's opportunity set. Under logarithmic utility, consumption is unaffected while the optimal portfolio weight shifts by $αV^{-1}d_V$; for a Heston asset, $π_t^\ast=α+(μ-r+α\varrhoξ/2)/V_t$, which can change sign across volatility states. Identifying the convention from return data alone is impossible without additional structural restrictions.

Fields of Study & Subjects

Stochastic processes and financial applications Risk and Portfolio Optimization Financial Markets and Investment Strategies

Publication details

Journal / source
arXiv (Cornell University)
Publication date
9 February 2026
Language
EN
Document type
Preprint