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arXiv · 1303.1248

Investment and Consumption with Regime-Switching Discount Rates

Traian Pirvu·Huayue Zhang
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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 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.

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Traian Pirvu, Huayue Zhang. 2013-03-06. Investment and Consumption with Regime-Switching Discount Rates. https://arxiv.org/abs/1303.1248

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