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Gain/loss asymmetric stochastic differential utility

Yuki Shigeta

Journal of Economic Dynamics and Control, 2020, vol. 118, issue C

Abstract: This study examines a gain/loss asymmetric utility in continuous time in which the investor discounts their utility gain by more than the utility loss. By employing the theory of stochastic differential utility, the model allows an endogenously time-varying subjective discount rate. In addition, the model can express various forms of utility functions including a version of the Epstein–Zin utility. Under the model, even if the state variables do not have any jump in their paths, the optimal consumption/wealth ratio and portfolio weight can change non-smoothly.

Keywords: Gain/loss asymmetry; Stochastic differential utility; Consumption–Investment problem; Subjective discount rates; Recursive utility; Portfolio selection (search for similar items in EconPapers)
JEL-codes: D15 G11 G40 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:118:y:2020:i:c:s0165188920301433

DOI: 10.1016/j.jedc.2020.103975

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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