Consumption and Portfolio Rules for Time-Inconsistent Investors
AbstractThis paper extends the classical consumption and portfolio rules model in continuous time (Merton 1969, 1971) to the framework of decision-makers with time-inconsistent preferences. The model is solved for different utility functions for both, naive and sophisticated agents, and the results are compared. In order to solve the problem for sophisticated agents, we derive a modified HJB (Hamilton-Jacobi-Bellman) equation. It is illustrated how for CRRA functions within the family of HARA functions (logarithmic and potential cases) the optimal portfolio rule does not depend on the discount rate, but this is not the case for a general utility function, such as the exponential (CARA) utility function.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0901.2484.
Date of creation: Jan 2009
Date of revision: Mar 2009
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Other versions of this item:
- Marín-Solano, Jesús & Navas, Jorge, 2010. "Consumption and portfolio rules for time-inconsistent investors," European Journal of Operational Research, Elsevier, vol. 201(3), pages 860-872, March.
- NEP-ALL-2009-09-26 (All new papers)
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