On Investment-Consumption with Regime-Switching

نویسندگان

  • Traian A. Pirvu
  • Huayue Zhang
چکیده

In a continuous time stochastic economy, this paper considers the problem of consumption and investment in a financial market in which the representative investor exhibits a change in the discount rate. The investment opportunities are a stock and a riskless account. The market coefficients and discount factor switches 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 Markov chain. Following [3] we introduce and characterize the equilibrium policies for power utility functions. Moreover, they are computed in closed form for logarithmic utility function. We show that a higher discount rate leads to a higher equilibrium consumption rate. Numerical experiments show the effect of both time preference and risk aversion on the equilibrium policies.

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عنوان ژورنال:
  • CoRR

دوره abs/1107.1895  شماره 

صفحات  -

تاریخ انتشار 2011