TY - GEN
T1 - Time-inconsistent portfolio investment problems
AU - Dong, Yidong
AU - Sircar, Ronnie
N1 - Publisher Copyright:
© Springer International Publishing Switzerland 2014.
PY - 2014
Y1 - 2014
N2 - The explicit results for the classical Merton optimal investment/ consumption problem rely on the use of constant risk aversion parameters and exponential discounting. However, many studies have suggested that individual investors can have different risk aversions over time, and they discount future rewards less rapidly than exponentially.While state-dependent risk aversions and non-exponential type (e.g. hyperbolic) discountings align more with the real life behavior and household consumption data, they have tractability issues and make the problem timeinconsistent. We analyze the cases where these problems can be closely approximated by time-consistent ones. By asymptotic approximations, we are able to characterize the equilibrium strategies explicitly in terms of the corrections to solutions for the base problems with constant risk aversion and exponential discounting. We also explore the effects of hyperbolic discounting under proportional transaction costs.
AB - The explicit results for the classical Merton optimal investment/ consumption problem rely on the use of constant risk aversion parameters and exponential discounting. However, many studies have suggested that individual investors can have different risk aversions over time, and they discount future rewards less rapidly than exponentially.While state-dependent risk aversions and non-exponential type (e.g. hyperbolic) discountings align more with the real life behavior and household consumption data, they have tractability issues and make the problem timeinconsistent. We analyze the cases where these problems can be closely approximated by time-consistent ones. By asymptotic approximations, we are able to characterize the equilibrium strategies explicitly in terms of the corrections to solutions for the base problems with constant risk aversion and exponential discounting. We also explore the effects of hyperbolic discounting under proportional transaction costs.
KW - Asymptotic methods
KW - Portfolio optimization
KW - Stochastic control
KW - Stochastic risk aversion
KW - Time-inconsistency
UR - http://www.scopus.com/inward/record.url?scp=84937192919&partnerID=8YFLogxK
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U2 - 10.1007/978-3-319-11292-3_9
DO - 10.1007/978-3-319-11292-3_9
M3 - Conference contribution
AN - SCOPUS:84937192919
T3 - Springer Proceedings in Mathematics and Statistics
SP - 239
EP - 281
BT - Stochastic Analysis and Applications 2014
A2 - Crisan, Dan
A2 - Hambly, Ben
A2 - Zariphopoulou, Thaleia
PB - Springer New York LLC
T2 - Conference on Stochastic Analysis and Applications, 2013
Y2 - 23 September 2013 through 27 September 2013
ER -