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A Mean Field Game Approach to Relative Investment-Consumption Games with Habit Formation

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  • Zongxia Liang
  • Keyu Zhang

Abstract

This paper studies an optimal investment-consumption problem for competitive agents with exponential or power utilities and a common finite time horizon. Each agent regards the average of habit formation and wealth from all peers as benchmarks to evaluate the performance of her decision. We formulate the n-agent game problems and the corresponding mean field game problems under the two utilities. One mean field equilibrium is derived in a closed form in each problem. In each problem with n agents, an approximate Nash equilibrium is then constructed using the obtained mean field equilibrium when n is sufficiently large. The explicit convergence order in each problem can also be obtained. In addition, we provide some numerical illustrations of our results.

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  • Zongxia Liang & Keyu Zhang, 2024. "A Mean Field Game Approach to Relative Investment-Consumption Games with Habit Formation," Papers 2401.15659, arXiv.org.
    • Handle: RePEc:arx:papers:2401.15659
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    References listed on IDEAS

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    1. Guanxing Fu & Chao Zhou, 2021. "Mean Field Portfolio Games," Papers 2106.06185, arXiv.org, revised Apr 2022.
    2. Jesus Fernández-Villaverde & Dirk Krueger, 2007. "Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 552-565, August.
    3. Guanxing Fu & Chao Zhou, 2023. "Mean field portfolio games," Finance and Stochastics, Springer, vol. 27(1), pages 189-231, January.
    4. Guanxing Fu, 2022. "Mean Field Portfolio Games with Consumption," Papers 2206.05425, arXiv.org, revised Dec 2022.
    5. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    6. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    7. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
    8. Thurow, Lester C, 1969. "The Optimum Lifetime Distribution of Consumption Expenditures," American Economic Review, American Economic Association, vol. 59(3), pages 324-330, June.
    9. Goncalo dos Reis & Vadim Platonov, 2020. "Forward utility and market adjustments in relative investment-consumption games of many players," Papers 2012.01235, arXiv.org, revised Mar 2022.
    10. Guanxing Fu, 2023. "Mean field portfolio games with consumption," Mathematics and Financial Economics, Springer, volume 17, number 4, February.
    11. Yushi Hamaguchi, 2019. "Time-inconsistent consumption-investment problems in incomplete markets under general discount functions," Papers 1912.01281, arXiv.org, revised Mar 2021.
    12. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
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    Cited by:

    1. Guohui Guan & Zongxia Liang & Yi Xia, 2024. "Many-insurer robust games of reinsurance and investment under model uncertainty in incomplete markets," Papers 2412.09157, arXiv.org.

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