Consumption-Portfolio Optimization with Recursive Utility in Incomplete Markets

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Standard

Consumption-Portfolio Optimization with Recursive Utility in Incomplete Markets. / Kraft, Holger; Seifried, Frank Thomas ; Steffensen, Mogens.

I: Finance and Stochastics, Bind 17, 2013, s. 161-196.

Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt

Harvard

Kraft, H, Seifried, FT & Steffensen, M 2013, 'Consumption-Portfolio Optimization with Recursive Utility in Incomplete Markets', Finance and Stochastics, bind 17, s. 161-196. https://doi.org/10.1007/s00780-012-0184-1

APA

Kraft, H., Seifried, F. T., & Steffensen, M. (2013). Consumption-Portfolio Optimization with Recursive Utility in Incomplete Markets. Finance and Stochastics, 17, 161-196. https://doi.org/10.1007/s00780-012-0184-1

Vancouver

Kraft H, Seifried FT, Steffensen M. Consumption-Portfolio Optimization with Recursive Utility in Incomplete Markets. Finance and Stochastics. 2013;17:161-196. https://doi.org/10.1007/s00780-012-0184-1

Author

Kraft, Holger ; Seifried, Frank Thomas ; Steffensen, Mogens. / Consumption-Portfolio Optimization with Recursive Utility in Incomplete Markets. I: Finance and Stochastics. 2013 ; Bind 17. s. 161-196.

Bibtex

@article{5e1a4f1766c247ad9a249ba281650645,
title = "Consumption-Portfolio Optimization with Recursive Utility in Incomplete Markets",
abstract = "In an incomplete market, we study the optimal consumption-portfolio decision of an investor with recursive preferences of Epstein–Zin type. Applying a classical dynamic programming approach, we formulate the associated Hamilton–Jacobi–Bellman equation and provide a suitable verification theorem. The proof ofthis verification theorem is complicated by the fact that the Epstein–Zin aggregator is non-Lipschitz, so standard verification results (e.g. in Duffie and Epstein, Econometrica 60, 393–394, 1992) are not applicable. We provide new explicit solutions to the Bellman equation with Epstein–Zin preferences in an incomplete market for non-unit elasticity of intertemporal substitution (EIS) and apply our verification result to prove that they solve the consumption-investment problem. We also compare our exact solutions to the Campbell–Shiller approximation and assess its accuracy.",
author = "Holger Kraft and Seifried, {Frank Thomas} and Mogens Steffensen",
year = "2013",
doi = "10.1007/s00780-012-0184-1",
language = "English",
volume = "17",
pages = "161--196",
journal = "Finance and Stochastics",
issn = "0949-2984",
publisher = "Springer",

}

RIS

TY - JOUR

T1 - Consumption-Portfolio Optimization with Recursive Utility in Incomplete Markets

AU - Kraft, Holger

AU - Seifried, Frank Thomas

AU - Steffensen, Mogens

PY - 2013

Y1 - 2013

N2 - In an incomplete market, we study the optimal consumption-portfolio decision of an investor with recursive preferences of Epstein–Zin type. Applying a classical dynamic programming approach, we formulate the associated Hamilton–Jacobi–Bellman equation and provide a suitable verification theorem. The proof ofthis verification theorem is complicated by the fact that the Epstein–Zin aggregator is non-Lipschitz, so standard verification results (e.g. in Duffie and Epstein, Econometrica 60, 393–394, 1992) are not applicable. We provide new explicit solutions to the Bellman equation with Epstein–Zin preferences in an incomplete market for non-unit elasticity of intertemporal substitution (EIS) and apply our verification result to prove that they solve the consumption-investment problem. We also compare our exact solutions to the Campbell–Shiller approximation and assess its accuracy.

AB - In an incomplete market, we study the optimal consumption-portfolio decision of an investor with recursive preferences of Epstein–Zin type. Applying a classical dynamic programming approach, we formulate the associated Hamilton–Jacobi–Bellman equation and provide a suitable verification theorem. The proof ofthis verification theorem is complicated by the fact that the Epstein–Zin aggregator is non-Lipschitz, so standard verification results (e.g. in Duffie and Epstein, Econometrica 60, 393–394, 1992) are not applicable. We provide new explicit solutions to the Bellman equation with Epstein–Zin preferences in an incomplete market for non-unit elasticity of intertemporal substitution (EIS) and apply our verification result to prove that they solve the consumption-investment problem. We also compare our exact solutions to the Campbell–Shiller approximation and assess its accuracy.

U2 - 10.1007/s00780-012-0184-1

DO - 10.1007/s00780-012-0184-1

M3 - Journal article

VL - 17

SP - 161

EP - 196

JO - Finance and Stochastics

JF - Finance and Stochastics

SN - 0949-2984

ER -

ID: 102779312