Retirement decision with addictive habit persistence in a jump diffusion market

Abstract

This paper investigates the optimal retirement decision, investment, and consumption strategies in a market with jump diffusion, taking into account habit persistence and stock-wage correlation. Our analysis considers multiple stocks and a finite time framework, intending to determine the retirement boundary of the ``wealth-habit-wage" triplet (x, h, w). To achieve this, we use the habit reduction method and a duality approach to obtain the retirement boundary of the primal variables and feedback forms of optimal strategies. When dealing with the dual problem, we address technical challenges in the proof of integral equation characterization of optimal retirement boundary using a C^1 version of It o's formula. Our results show that when the so-called ``de facto wealth" exceeds a critical proportion of wage, an immediate retirement is the optimal choice for the agent. Additionally, we find that the introduction of jump risks allows for the possibility of discontinuous investment strategies within the working region, which is a novel and insightful finding. Our numerical results effectively illustrate these findings by varying the parameters.

Tasks

Reproductions