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Do Time Preferences Matter in Intertemporal Consumption and Portfolio Decisions?

Author

Listed:
  • Chen Shou
  • Xiang Shengpeng
  • He Hongbo

    (Business School, Hunan University, Changsha, 410082, China)

Abstract

We study the intertemporal consumption and portfolio rules in the model with the general hyperbolic absolute risk aversion (HARA) utility. The equivalent approximation approach is employed to obtain the Hamilton-Jacobi-Bellman (HJB) equations, and a remarkable property is shown: portfolio rules are independent of the discount function. Moreover, both the consumption and portfolio rates are non-increasing functions of wealth. Particularly illustrative cases examined in detail are the models with the most adopted discount functions, including exponential discounting and hyperbolic discounting. Explicit solutions for intertemporal decisions are found for these special cases, revealing that individual’s time preferences affect the consumption rules only. Moreover, the time-consistent consumption rate under hyperbolic discounting is larger than its counterpart under exponential discounting.

Suggested Citation

  • Chen Shou & Xiang Shengpeng & He Hongbo, 2019. "Do Time Preferences Matter in Intertemporal Consumption and Portfolio Decisions?," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(2), pages 1-13, June.
    • Handle: RePEc:bpj:bejtec:v:19:y:2019:i:2:p:13:n:4
    DOI: 10.1515/bejte-2017-0122
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    References listed on IDEAS

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    More about this item

    Keywords

    hyperbolic discounting; time consistency; equivalent approximation approach; HJB equation; consumption and portfolio rules;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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