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Investment and Consumption with Regime-Switching Discount Rates

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  • Traian Pirvu
  • Huayue Zhang

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.

Suggested Citation

  • Traian Pirvu & Huayue Zhang, 2013. "Investment and Consumption with Regime-Switching Discount Rates," Papers 1303.1248, arXiv.org.
    • Handle: RePEc:arx:papers:1303.1248
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    References listed on IDEAS

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    Cited by:

    1. Alin OPREANA, 2015. "A New Perspective of Investment Modelling at the European Union Level," Expert Journal of Economics, Sprint Investify, vol. 3(2), pages 143-148.

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