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Gain/loss asymmetric stochastic differential utility

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  • Shigeta, Yuki

Abstract

This study examines a gain/loss asymmetric utility in continuous time in which the investor discounts their utility gain by more than the utility loss. By employing the theory of stochastic differential utility, the model allows an endogenously time-varying subjective discount rate. In addition, the model can express various forms of utility functions including a version of the Epstein–Zin utility. Under the model, even if the state variables do not have any jump in their paths, the optimal consumption/wealth ratio and portfolio weight can change non-smoothly.

Suggested Citation

  • Shigeta, Yuki, 2020. "Gain/loss asymmetric stochastic differential utility," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:dyncon:v:118:y:2020:i:c:s0165188920301433
    DOI: 10.1016/j.jedc.2020.103975
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    More about this item

    Keywords

    Gain/loss asymmetry; Stochastic differential utility; Consumption–Investment problem; Subjective discount rates; Recursive utility; Portfolio selection;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General

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