Consumption-investment strategies with non-exponential discounting and logarithmic utility

Qian Zhao, Yang Shen, Jiaqin Wei

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)

Abstract

In this paper, we revisit the consumption-investment problem with a general discount function and a logarithmic utility function in a non-Markovian framework. The coefficients in our model, including the interest rate, appreciation rate and volatility of the stock, are assumed to be adapted stochastic processes. Following Yong (2012a,b)'s method, we study an N-person differential game. We adopt a martingale method to solve an optimization problem of each player and characterize their optimal strategies and value functions in terms of the unique solutions of BSDEs. Then by taking limit, we show that a time-consistent equilibrium consumption-investment strategy of the original problem consists of a deterministic function and the ratio of the market price of risk to the volatility, and the corresponding equilibrium value function can be characterized by the unique solution of a family of BSDEs parameterized by a time variable.
Original languageEnglish
Pages (from-to)824-835
Number of pages12
JournalEuropean Journal of Operational Research
Volume238
Issue number3
DOIs
Publication statusPublished - 1 Nov 2014

Keywords

  • BSDEs
  • Consumption-investment problem
  • Multi-person differential game
  • Non-exponential discounting
  • Time-inconsistency

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