Chapter 19 Dynamic Portfolio Choice and Risk Aversion

Costis Skiadas*

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

12 Scopus citations

Abstract

This chapter presents a theory of optimal lifetime consumption-portfolio choice in a continuous information setting, with emphasis on the modeling of risk aversion through generalized recursive utility. A novel contribution is a decision theoretic development of the notions of source-dependent first- or second-order risk aversion. Backward stochastic differential equations (BSDEs) are explained heuristically as continuous-information versions of backward recursions on an information tree, and are used to formulate utility functions as well as optimality conditions. The role of scale invariance and quadratic BSDEs in obtaining tractable solutions is explained. A final section outlines extensions, including optimality conditions under trading constraints, and tractable formulations with nontradeable income.

Original languageEnglish (US)
Pages (from-to)789-843
Number of pages55
JournalHandbooks in Operations Research and Management Science
Volume15
Issue numberC
DOIs
StatePublished - Dec 1 2007

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Computer Science Applications
  • Management Science and Operations Research

Fingerprint Dive into the research topics of 'Chapter 19 Dynamic Portfolio Choice and Risk Aversion'. Together they form a unique fingerprint.

Cite this