Time-inconsistent portfolio investment problems

Yidong Dong, Ronnie Sircar

Research output: Chapter in Book/Report/Conference proceedingConference contribution

9 Scopus citations

Abstract

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.

Original languageEnglish (US)
Title of host publicationStochastic Analysis and Applications 2014
EditorsDan Crisan, Ben Hambly, Thaleia Zariphopoulou
PublisherSpringer New York LLC
Pages239-281
Number of pages43
ISBN (Electronic)9783319112916
DOIs
StatePublished - Jan 1 2014
EventConference on Stochastic Analysis and Applications, 2013 - Oxford, United Kingdom
Duration: Sep 23 2013Sep 27 2013

Publication series

NameSpringer Proceedings in Mathematics and Statistics
Volume100
ISSN (Print)2194-1009
ISSN (Electronic)2194-1017

Other

OtherConference on Stochastic Analysis and Applications, 2013
CountryUnited Kingdom
CityOxford
Period9/23/139/27/13

All Science Journal Classification (ASJC) codes

  • Mathematics(all)

Keywords

  • Asymptotic methods
  • Portfolio optimization
  • Stochastic control
  • Stochastic risk aversion
  • Time-inconsistency

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