Abstract

http://ssrn.com/abstract=1465110
 
 

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Consumption and Portfolio Rules with Stochastic Quasi-Hyperbolic Discounting


Ignacio Palacios-Huerta


London School of Economics

Alonso Pérez-Kakabadse


London School of Economics & Political Science (LSE) - Department of Economics; Moore Capital Management

January 1, 2011


Abstract:     
We investigate the joint consumption-saving and portfolio-selection problem under capital risk, assuming sophisticated but time-inconsistent agents. We introduce stochastic hyperbolic preferences as specified in Harris and Laibson (2008) and find closed-form solutions for the classic Merton (1969, 1971) optimal consumption and portfolio selection problem in continuous time. The portfolio rule remains identical to the time-consistent solution with power utility with no borrowing constraints. However, the marginal propensity to consume out of wealth is unambiguously greater than the time-consistent, exponential case.

Number of Pages in PDF File: 24

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Date posted: May 26, 2011  

Suggested Citation

Palacios-Huerta, Ignacio and Pérez-Kakabadse, Alonso, Consumption and Portfolio Rules with Stochastic Quasi-Hyperbolic Discounting (January 1, 2011). Available at SSRN: http://ssrn.com/abstract=1465110 or http://dx.doi.org/10.2139/ssrn.1465110

Contact Information

Ignacio Palacios-Huerta
London School of Economics ( email )
Dept. of Management
Houghton Street
London, WC2A 2AE
United Kingdom
Alonso Pérez-Kakabadse (Contact Author)
London School of Economics & Political Science (LSE) - Department of Economics ( email )
Houghton Street
London WC2A 2AE
United Kingdom
Moore Capital Management
1 Curzon Street
London, W1J 5HA
United Kingdom
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