Investment-consumption with regime-switching discount rates

This paper considers the problem of consumption and investment in a financial market within a continuous time stochastic economy. The investor exhibits a change in the discount rate. The investment opportunities are a stock and a riskless account. The market coefficients and discount factor switch according to a finite state Markov chain. The change in the discount rate leads to time inconsistencies of the investor's decisions. The randomness in our model is driven by a Brownian motion and a Markov chain. Following Ekeland and Pirvu (2008) we introduce and characterize the subgame perfect strategies. Numerical experiments show the effect of time preference on subgame perfect strategies and the pre-commitment strategies. (C) 2014 Elsevier B.V. All rights reserved.