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arXiv · 1705.10602

Time-consistent investment and consumption strategies under a general discount function

I. Alia·F. Chighoub·N. Khelfallah·J. Vives
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Abstract

The paper [12] examines a concept of equilibrium policies instead of optimal controls in stochastic optimization to analyze a mean-variance portfolio selection problem. We follow the same approach in order to investigate the Merton portfolio management problem in the context of non-exponential discounting, a context that give rise to time-inconsistency of the decision maker. Equilibrium policies are characterized in this context by means of a variational method which leads to a stochastic system that consists of a flow of forward-backward stochastic differential equations and an equilibrium condition. An explicit representation of the equilibrium policies is provided for the special cases of power, logarithmic and exponential utility functions.

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I. Alia, F. Chighoub, N. Khelfallah, J. Vives. 2017-05-28. Time-consistent investment and consumption strategies under a general discount function. https://arxiv.org/abs/1705.10602

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