Equilibrium consumption and portfolio decisions with stochastic discount rate and time-varying utility functions

Springer Science and Business Media LLC - Tập 40 - Trang 541-582 - 2017
Huiling Wu1, Chengguo Weng2, Yan Zeng3
1China Institute for Actuarial Science, Central University of Finance and Economics, Beijing, People’s Republic of China
2Department of Statistics and Actuarial Science, University of Waterloo, Waterloo, Canada
3Lingnan (University) College, Sun Yat-sen University, Guangzhou, People’s Republic of China

Tóm tắt

This paper studies a multi-period investment–consumption optimization problem with a stochastic discount rate and a time-varying utility function, which are governed by a Markov-modulated regime switching model. The investment is dynamically reallocated between one risk-free asset and one risky asset. The problem is time inconsistent due to the stochastic discount rate. An analytical equilibrium solution is established by resorting to a game theoretical framework. Numerous sensitivity analyses and numerical examples are provided to demonstrate the effects of the stochastic discount rate and time-varying utility coefficients on the decision-maker’s investment–consumption behavior. Our results show that many properties which are satisfied in the classical models do not hold any more due to either the stochastic discount rate or the time-varying utility function.

Tài liệu tham khảo

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