Investment and Consumption with Regime-Switching Discount Rates

Traian Pirvu and Huayue Zhang

Papers from arXiv.org

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.

Date: 2013-03
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