PORTFOLIO SELECTION WITH HYPERBOLIC DISCOUNTING AND INFLATION RISK

This paper investigates the time-inconsistent agent s optimal consumption and investment problem under inflation risk. The agents discount factor is governed by hyperbolic discounting, which has a random time to change. We impose the inflation risk which plays a crucial role in long-term financial planning. We derive the semi-analytic solution to the problem of sophisticated agents when the time horizon is finite.

1. Introduction

2. Model setup

3. Problem and HJB equation

4. Optimal policies

5. Conclusion

References

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