Investment and Consumption with Regime-Switching Discount Rates
This paper considers the problem of consumption and investment in a financial market within a continuous time stochastic economy. The investor exhibits a change in the discount rate. The investment opportunities are a stock and a riskless account. The market coefficients and discount factor switch according to a finite state Markov chain. The change in the discount rate leads to time inconsistencies of the investor's decisions. The randomness in our model is driven by a Brownian motion and a Markov chain. Following Ekeland and Pirvu we introduce and characterize the subgame perfect strategies. Numerical experiments show the effect of time preference on subgame perfect strategies and the pre-commitment strategies.
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- Merton, Robert C., 1971.
"Optimum consumption and portfolio rules in a continuous-time model,"
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- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
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"Consumption and Portfolio Rules for Time-Inconsistent Investors,"
0901.2484, arXiv.org, revised Mar 2009.
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- 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 247-57, August.
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