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Dynamic consumption and portfolio choice considering information learning and stochastic interest rate

Author

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  • Zhou, Minna
  • Liu, Yongjun

Abstract

This paper investigates the consumption–portfolio choice of investors with information learning ability when faced with historical performance, within a stochastic interest rate framework. We simultaneously analyze investor behaviors, specifically momentum trading and contrarian trading. Using the dynamic programming method, we derive the closed-form solutions. The numerical results demonstrate how investors with heterogeneous characteristics make consumption–investment allocations in response to different historical performances. We find that momentum investors tend to overreact to short-term market fluctuations, while contrarian investors focus on long-term investment potential and market reversals. In addition, our findings suggest that information utility is time-sensitive and decays over time.

Suggested Citation

  • Zhou, Minna & Liu, Yongjun, 2024. "Dynamic consumption and portfolio choice considering information learning and stochastic interest rate," Finance Research Letters, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324005245
    DOI: 10.1016/j.frl.2024.105494
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