English

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}
}