Investment–consumption with regime-switching discount rates

Traian A. Pirvu and Huayue Zhang

Mathematical Social Sciences, 2014, vol. 71, issue C, 142-150

Abstract: This paper considers the problem of consumption and investment in a financial market within a continuous time stochastic economy. The investor exhibits a change in the discount rate. The investment opportunities are a stock and a riskless account. The market coefficients and discount factor switch according to a finite state Markov chain. The change in the discount rate leads to time inconsistencies of the investor’s decisions. The randomness in our model is driven by a Brownian motion and a Markov chain. Following Ekeland and Pirvu (2008) we introduce and characterize the subgame perfect strategies. Numerical experiments show the effect of time preference on subgame perfect strategies and the pre-commitment strategies.

Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:71:y:2014:i:c:p:142-150

DOI: 10.1016/j.mathsocsci.2014.07.001

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