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 language | English (US) |
|---|---|
| Pages (from-to) | 789-843 |
| Number of pages | 55 |
| Journal | Handbooks in Operations Research and Management Science |
| Volume | 15 |
| Issue number | C |
| DOIs | |
| State | Published - Dec 1 2007 |
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
- Computer Science Applications
- Management Science and Operations Research