Dynamic consumption and portfolio choice considering information learning and stochastic interest rate

Abstract

This paper investigates the consumption–portfolio choice of investors with information learning ability when faced with historical performance, within a stochastic interest rate framework. We simultaneously analyze investor behaviors, specifically momentum trading and contrarian trading. Using the dynamic programming method, we derive the closed-form solutions. The numerical results demonstrate how investors with heterogeneous characteristics make consumption–investment allocations in response to different historical performances. We find that momentum investors tend to overreact to short-term market fluctuations, while contrarian investors focus on long-term investment potential and market reversals. In addition, our findings suggest that information utility is time-sensitive and decays over time.