Dynamic consumption and portfolio choice considering information learning and stochastic interest rate

Minna Zhou and Yongjun Liu

Finance Research Letters, 2024, vol. 65, issue C

Abstract: This paper investigates the consumption–portfolio choice of investors with information learning ability when faced with historical performance, within a stochastic interest rate framework. We simultaneously analyze investor behaviors, specifically momentum trading and contrarian trading. Using the dynamic programming method, we derive the closed-form solutions. The numerical results demonstrate how investors with heterogeneous characteristics make consumption–investment allocations in response to different historical performances. We find that momentum investors tend to overreact to short-term market fluctuations, while contrarian investors focus on long-term investment potential and market reversals. In addition, our findings suggest that information utility is time-sensitive and decays over time.

Keywords: Consumption–portfolio choice; Information learning; Stochastic control; Stochastic interest rate; Behavioral finance (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324005245

DOI: 10.1016/j.frl.2024.105494

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