Asset Pricing with Dynamically Inconsistent Agents

59 Pages Posted: 19 Oct 2016

See all articles by Mariana Khapko

Mariana Khapko

University of Toronto - Finance Area; Swedish House of Finance

Date Written: September 28, 2015

Abstract

This paper develops a framework to study general equilibrium implications for an economy in which agents are allowed to have dynamically inconsistent time and risk preferences. This framework accommodates, but is not limited to, the following settings: (1) non-exponential discounting; (2) horizon dependent risk aversion; (3) current state dependent risk aversion. In these models preferences over future outcomes change over time and thus the Bellman optimality principle does not hold. In the spirit of Strotz (1955) I take a game theoretic approach to the solution of agent's problem.

Keywords: Time consistency, time inconsistency, time inconsistent control, stochastic control, equilibrium

JEL Classification: C61, C72, C73, G11, G12

Suggested Citation

Khapko, Mariana, Asset Pricing with Dynamically Inconsistent Agents (September 28, 2015). Available at SSRN: https://ssrn.com/abstract=2854526 or http://dx.doi.org/10.2139/ssrn.2854526

Mariana Khapko (Contact Author)

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm
Sweden

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