Using Martingale methods, we study the problem of optimal consumption-investment strategies in a complete financial market characterized by stochastic volatility. With Heston’s model as the working example, we derive optimal strategies for a constant relative risk aversion (CRRA) investor with particular attention to the cases where (i) she solely seeks to optimize her utility for consumption, and (ii) she solely seeks to optimize her bequest from investing in the market. Furthermore, we test the practical utility of our work by conducting an empirical study based on real market-data from the S&P500 index. Here, we concentrate on wealth maximization and investigate the degree to which the inclusion of derivatives facilitates higher welfare gains. Our experiments show that this is indeed the case, although we do not observe realized wealth-equivalents as high as expected. Indeed, if we factor in the increased transaction costs associated with including options, the results are somewhat less convincing.
State-Dependent Utility