Do Time Preferences Matter in Intertemporal Consumption and Portfolio Decisions?

Chen Shou, Xiang Shengpeng and He Hongbo ()
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Chen Shou: Business School, Hunan University, Changsha, 410082, China
Xiang Shengpeng: Business School, Hunan University, Changsha, 410082, China
He Hongbo: Business School, Hunan University, Changsha, 410082, China

The B.E. Journal of Theoretical Economics, 2019, vol. 19, issue 2, 13

Abstract: We study the intertemporal consumption and portfolio rules in the model with the general hyperbolic absolute risk aversion (HARA) utility. The equivalent approximation approach is employed to obtain the Hamilton-Jacobi-Bellman (HJB) equations, and a remarkable property is shown: portfolio rules are independent of the discount function. Moreover, both the consumption and portfolio rates are non-increasing functions of wealth. Particularly illustrative cases examined in detail are the models with the most adopted discount functions, including exponential discounting and hyperbolic discounting. Explicit solutions for intertemporal decisions are found for these special cases, revealing that individual’s time preferences affect the consumption rules only. Moreover, the time-consistent consumption rate under hyperbolic discounting is larger than its counterpart under exponential discounting.

Keywords: hyperbolic discounting; time consistency; equivalent approximation approach; HJB equation; consumption and portfolio rules (search for similar items in EconPapers)
JEL-codes: C61 D91 G11 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/bejte-2017-0122

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