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Optimal consumption and portfolio choices in the stochastic SIS model

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  • Li, Shilin
  • Li, Tongtong
  • Yang, Jinqiang

Abstract

Motivated by the stochastic SIS model, this paper aims to incorporate the stochastic transmission shock (e.g., COVID−19) into the standard portfolio theory, and explores the optimal rules with respect to infections. The impact of COVID−19 is decomposed into two dimensions such as infectivity (denoted by R0) and infection rate (measured by I). The results indicate that infectivity mainly affects consumption, whereas the investment rule is merely governed by infection rate. Moreover, we find that higher infections lead to less sensitivity and smoother consumption compared with normal times. However, the sensitivity and volatility of investment with respect to infections present a U-shape and hump-shape, respectively. Notably, we shed new lights on the effect of transmission uncertainty and risk-aversion with pandemic shock. The innovative attempt of this paper not only enriches the research of epidemiology in the field of economics, but also provides a paradigm for studying investor’s behavior under the normalization of epidemic situations.

Suggested Citation

  • Li, Shilin & Li, Tongtong & Yang, Jinqiang, 2022. "Optimal consumption and portfolio choices in the stochastic SIS model," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001267
    DOI: 10.1016/j.najef.2022.101787
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    References listed on IDEAS

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    1. Yao, Yanming & Luo, Pengfei, 2023. "Optimal capital structure and credit spreads under pandemic shocks," Economics Letters, Elsevier, vol. 224(C).

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    More about this item

    Keywords

    Optimal consumption; Portfolio allocation; Transmission uncertainty; Infectivity; Infection rate; Vaccination;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • I10 - Health, Education, and Welfare - - Health - - - General

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