Equilibrium consumption and portfolio decisions with stochastic discount rate and time-varying utility functions

Huiling Wu (), Chengguo Weng () and Yan Zeng ()
Additional contact information
Huiling Wu: Central University of Finance and Economics
Chengguo Weng: University of Waterloo
Yan Zeng: Sun Yat-sen University

OR Spectrum: Quantitative Approaches in Management, 2018, vol. 40, issue 2, No 10, 582 pages

Abstract: Abstract This paper studies a multi-period investment–consumption optimization problem with a stochastic discount rate and a time-varying utility function, which are governed by a Markov-modulated regime switching model. The investment is dynamically reallocated between one risk-free asset and one risky asset. The problem is time inconsistent due to the stochastic discount rate. An analytical equilibrium solution is established by resorting to a game theoretical framework. Numerous sensitivity analyses and numerical examples are provided to demonstrate the effects of the stochastic discount rate and time-varying utility coefficients on the decision-maker’s investment–consumption behavior. Our results show that many properties which are satisfied in the classical models do not hold any more due to either the stochastic discount rate or the time-varying utility function.

Keywords: Nash equilibrium; Stochastic discount rate; Investment–consumption; Regime switching (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1007/s00291-017-0502-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:orspec:v:40:y:2018:i:2:d:10.1007_s00291-017-0502-2

Ordering information: This journal article can be ordered from
http://www.springer. ... research/journal/291

DOI: 10.1007/s00291-017-0502-2

Access Statistics for this article

OR Spectrum: Quantitative Approaches in Management is currently edited by Rainer Kolisch

More articles in OR Spectrum: Quantitative Approaches in Management from Springer, Gesellschaft für Operations Research e.V.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().