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Global Optimal Consumption–Portfolio Rules with Myopic Preferences and Loss Aversion

Author

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  • Jia Yue

    (Southwestern University of Finance and Economics)

  • Ming-Hui Wang

    (Southwestern University of Finance and Economics)

  • Nan-Jing Huang

    (Sichuan University)

Abstract

In this paper, we construct a continuous-time market where the investor’s preferences take the form of myopic preferences used in Basak et al. (Rev Financ Stud 32:4905–4946, 2019) and the utility is assigned to the investor’s gains and losses with loss aversion. Myopic preferences make our financial model flexible and generally applicable in continuous-time markets, and loss aversion poses limitation to the investor’s consumption and investment. Then we derive the global optimal solutions to the related optimization problems through different regions, thereby obtaining global optimal consumption–portfolio rules for the investor. Candidates in different regions for global optimal consumption–portfolio rules could indicate how the investor reacts to consumption and investment with myopic preferences and loss aversion. The theoretical and numerical analysis shows that myopic preferences and loss aversion enable the investor to comply with optimal consumption–portfolio rules by balancing consumption against investment.

Suggested Citation

  • Jia Yue & Ming-Hui Wang & Nan-Jing Huang, 2022. "Global Optimal Consumption–Portfolio Rules with Myopic Preferences and Loss Aversion," Computational Economics, Springer;Society for Computational Economics, vol. 60(4), pages 1427-1455, December.
    • Handle: RePEc:kap:compec:v:60:y:2022:i:4:d:10.1007_s10614-021-10187-6
    DOI: 10.1007/s10614-021-10187-6
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