Optimal consumption and portfolio choices in the stochastic SIS model

Shilin Li, Tongtong Li and Jinqiang Yang

The North American Journal of Economics and Finance, 2022, vol. 63, issue C

Abstract: Motivated by the stochastic SIS model, this paper aims to incorporate the stochastic transmission shock (e.g., COVID−19) into the standard portfolio theory, and explores the optimal rules with respect to infections. The impact of COVID−19 is decomposed into two dimensions such as infectivity (denoted by R0) and infection rate (measured by I). The results indicate that infectivity mainly affects consumption, whereas the investment rule is merely governed by infection rate. Moreover, we find that higher infections lead to less sensitivity and smoother consumption compared with normal times. However, the sensitivity and volatility of investment with respect to infections present a U-shape and hump-shape, respectively. Notably, we shed new lights on the effect of transmission uncertainty and risk-aversion with pandemic shock. The innovative attempt of this paper not only enriches the research of epidemiology in the field of economics, but also provides a paradigm for studying investor’s behavior under the normalization of epidemic situations.

Keywords: Optimal consumption; Portfolio allocation; Transmission uncertainty; Infectivity; Infection rate; Vaccination (search for similar items in EconPapers)
JEL-codes: C61 G11 I10 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001267

DOI: 10.1016/j.najef.2022.101787

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