Periodic portfolio selection with quasi-hyperbolic discounting
Portfolio Management
2024-10-25 v1 General Economics
Economics
General Finance
Mathematical Finance
Abstract
We introduce an infinite-horizon, continuous-time portfolio selection problem faced by an agent with periodic S-shaped preference and present bias. The inclusion of a quasi-hyperbolic discount function leads to time-inconsistency and we characterize the optimal portfolio for a pre-committing, naive and sophisticated agent respectively. In the more theoretically challenging problem with a sophisticated agent, the time-consistent planning strategy can be formulated as an equilibrium to a static mean field game. Interestingly, present bias and naivety do not necessarily result in less desirable risk taking behaviors, while agent's sophistication may lead to excessive leverage (underinvestement) in the bad (good) states of the world.
Keywords
Cite
@article{arxiv.2410.18240,
title = {Periodic portfolio selection with quasi-hyperbolic discounting},
author = {Yushi Hamaguchi and Alex S. L. Tse},
journal= {arXiv preprint arXiv:2410.18240},
year = {2024}
}