Portfolio selection with regime-switching and state-dependent preferences
The authors consider the general and flexible regime-switching model. More precisely, they study the consumption-investment problem in a regime-switching model with both the discount function and relative/absolute risk aversion depending on the exogenous environment. They use the equilibrium Hamilton-Jacobi-Bellman (HJB) equation to obtain the solution for the sophisticated agent. To get the strategy and value function for the naive agent, two systems of partial differential equations (with one of them being the HJB equation) are introduced. For power, logarithmic and exponential utilities, the solutions for sophisticated and naive agents are characterized by the unique solutions to a system of integral equations and two systems of ordinary differential equations, respectively. Some comparisons between the strategies for these two kinds of agents are given.
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