Investment-consumption with regime-switching discount rates

DOI10.1016/J.MATHSOCSCI.2014.07.001zbMATH Open1308.91146arXiv1303.1248OpenAlexW2192657731MaRDI QIDQ459181FDOQ459181

Huayue Zhang, Traian A. Pirvu

Publication date: 8 October 2014

Published in: Mathematical Social Sciences (Search for Journal in Brave)

Abstract: This paper considers the problem of consumption and investment in a financial market within a continuous time stochastic economy. The investor exhibits a change in the discount rate. The investment opportunities are a stock and a riskless account. The market coefficients and discount factor switch according to a finite state Markov chain. The change in the discount rate leads to time inconsistencies of the investor's decisions. The randomness in our model is driven by a Brownian motion and a Markov chain. Following Ekeland and Pirvu we introduce and characterize the subgame perfect strategies. Numerical experiments show the effect of time preference on subgame perfect strategies and the pre-commitment strategies.

Full work available at URL: https://arxiv.org/abs/1303.1248

Mathematics Subject Classification ID

Applications of continuous-time Markov processes on discrete state spaces (60J28) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Portfolio theory (91G10) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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Cited In (14)

• Stochastic production planning with regime switching
• Portfolio selection with regime-switching and state-dependent preferences
• Optimal investment and consumption when regime transitions cause price shocks
• Stochastic control with inhomogeneous regime switching: application to consumption and investment with unemployment and reemployment
• Strong and Weak Equilibria for Time-Inconsistent Stochastic Control in Continuous Time
• Optimal portfolio and consumption rule with a CIR model under HARA utility
• Equilibrium consumption and portfolio decisions with stochastic discount rate and time-varying utility functions
• On time-inconsistent stochastic control in continuous time
• Optimal investment-consumption strategy under inflation in a Markovian regime-switching market
• Time-consistent consumption-portfolio control problems with regime-switching-modulated habit formation: an essentially cooperative approach
• Mean-Variance Portfolio Selection under a Non-Markovian Regime-Switching Model: Time-Consistent Solutions
• Stochastic differential game, Esscher transform and general equilibrium under a Markovian regime-switching Lévy model
• Nonrecursive separation of risk and time preferences
• A Stochastic production planning problem

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