Stochastic control with inhomogeneous regime switching: Application to consumption and investment with unemployment and reemployment

Cheng Tao, Ximin Rong and Hui Zhao

Journal of Mathematical Economics, 2023, vol. 107, issue C

Abstract: This paper presents a stochastic control problem with an inhomogeneous regime switching and applies it to a consumption and investment model. We prove that the inhomogeneous Markov chain is a semimartingale, providing a basis to extend the HJB equations with regime switching to inhomogeneous cases. Explicit solutions are obtained by solving the corresponding HJB equations. Additionally, we study the impact of different levels of unemployment income and intensities of unemployment and reemployment on consumption and value function. Our findings suggest that improving unemployment security and reemployment intensity can increase overall happiness and improve the total value function.

Keywords: Inhomogeneous regime switching; Unemployment and reemployment; Optimal investment and consumption; Stochastic optimal control; semimartingale (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:107:y:2023:i:c:s0304406823000423

DOI: 10.1016/j.jmateco.2023.102849

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