Work

Life-cycle planning with CEV model and time-inconsistent preferences

Year: 2024

Type: article

Abstract: In this paper, we investigate an optimization problem for a wage earner seeking to maximize expected utilities until retirement by choosing optimal consumption, investment, and life insurance purchase strategies. The constant elasticity of variance (CEV) model is adopted describe the price process of the risky asset. Additionally, we assume that the wage earner has time-inconsistent preferences. This makes the wage earner discount her payoff by a non-constant discount rate. Applying the dynamic programming principle, we have derived the HamiltonJacobi-Bellman (HJB) equation corresponding to the optimization problem. Furthermore, we present semi-analytical expressions for optimal strategies and value functions in three cases: the benchmark model with time-consistent preferences, the naive and sophisticated wage earners with time-inconsistent preferences. Finally, illustrations of the optimal solutions and some economic insights are provided in the numerical examples.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2024.103517

Authors: Hao Wang, Shujie Hu, Tak Kuen Siu, Rongming Wang, Ning Wang

Institutions: Anhui Normal University, Macquarie University, East China Normal University, Australian National University

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,790

Funder: National Natural Science Foundation of China