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Optimal portafolio and consumption decisions under exchange rate and interest rate risks. A jump-diffusion approach

Author

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  • Venegas Martínez Francisco

    () (Instituto Politécnico Nacional)

  • Rodríguez Nava Abigail

    () (Universidad Autónoma Metropolitana)

Abstract

This research develops a stochastic model of the consumer's decision making under an environment of risk and uncertainty. In the proposed model agents perceive that a mixed diffusionjump process drives the exchange rate depreciation and a diffusion process governs the real interest rate, these processes are supposed to be correlated. We generalize the proposals from Giuliano and Turnovsky (2003), Grinols and Turnovsky (1993) and Merton (1969 and 1971) by including sudden and unexpected jumps in the stochastic dynamics of relevant variables in the intended model. We examine portfolio, consumption and wealth equilibrium dynamics under the optimal decisions. We also assess the effects on portfolio, consumption and welfare of sudden and permanent changes in the parameters determining the expectations of the exchange rate depreciation.

Suggested Citation

  • Venegas Martínez Francisco & Rodríguez Nava Abigail, 2010. "Optimal portafolio and consumption decisions under exchange rate and interest rate risks. A jump-diffusion approach," Contaduría y Administración, Accounting and Management, vol. 55(1), pages 9-24, enero-abr.
  • Handle: RePEc:nax:conyad:v:55:y:2010:i:1:p:9-24
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    File URL: http://www.revistas.unam.mx/index.php/rca/article/viewFile/14918/14212
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    File URL: http://www.revistas.unam.mx/index.php/rca/article/view/14918
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    References listed on IDEAS

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    1. Grinols, Earl L. & Turnovsky, Stephen J., 1993. "Risk, the financial market, and macroeconomic equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 1-36.
    2. Giuliano, Paola & Turnovsky, Stephen J., 2003. "Intertemporal substitution, risk aversion, and economic performance in a stochastically growing open economy," Journal of International Money and Finance, Elsevier, vol. 22(4), pages 529-556, August.
    3. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August.
    4. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    5. Venegas-Martinez, Francisco, 2001. "Temporary stabilization: A stochastic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 25(9), pages 1429-1449, September.
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    Cited by:

    1. repec:nax:conyad:v:62:y:2017:i:4:p:1335-1344 is not listed on IDEAS

    More about this item

    Keywords

    Portfolio Choice; Intertemporal Consumer Choice; Consumer Behavior;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D10 - Microeconomics - - Household Behavior - - - General

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