Investment and Consumption with Regime-Switching Discount Rates
Abstract
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.
Keywords
Cite
@article{arxiv.1303.1248,
title = {Investment and Consumption with Regime-Switching Discount Rates},
author = {Traian Pirvu and Huayue Zhang},
journal= {arXiv preprint arXiv:1303.1248},
year = {2013}
}
Comments
arXiv admin note: substantial text overlap with arXiv:1107.1895