Momentum And Inflation In Optimal Consumption Investment Strategy Based On Recursive Utility

Momentum effect widely exists in financial data series such as stocks,interest rates and exchange rates.It reflects the inherent equilibrium mechanism of asset price series to a certain extent.Inflation has become an economic problem commonly faced by countries around the world,and China has been affected by inflation.Based on the traditional optimal consumption investment problem,this paper adds the momentum effect state variable to the stock price process and introduces inflation at the same time.This paper studies the impact of these two factors on the optimal consumption investment portfolio.We first establish the momentum effect state variable,assuming that the investor has a recursive utility,and obtain a basic mathematical model.Then the HJB equation is obtained,and the analytical solution is deduced to obtain the optimal strategy solution of consumption investment portfolio.Finally,we do some numerical analysis to illustrate the effects of inflation and momentum effects on portfolio selection.Studies show that:(1)The optimal portfolio allocation to stocks depends strongly on risk aversion,but hardly at all on the elasticity of intertemporal substitution.(2)For investors whose relative risk aversion coefficient is greater than 1,when the stock's recent return is non-negative or moderate negative,the hedging demand motives greatly reduces the demand for the stock;when the stock's recent return is sufficiently negative,hedging demand motives increase investor demand for stocks.(3)The impact of inflation on the optimal consumption investment portfolio cannot be ignored,and according to the positive and negative correlation between inflation and the price of the securities market,inflation affects the optimal strategy in different directions.Compared with other literatures,the innovation points of this paper are:(1)Based on the traditional optimal consumption investment problem,also introduces inflation and momentum effects,and analyzes the impact of these two factors on the optimal investment portfolio.(2)Both the power utility function and the exponential utility function have certain limitations.Therefore,this paper uses a more general recursive utility function.(3)We separate the impact of risk aversion and the impact of intertemporal substitution elasticity.Under different relative risk aversion coefficients and the level of intertemporal substitution elasticity,we study the effects of momentum and inflation on optimal strategies and the impact on hedging demand.