Abstract
We analyze the lifetime consumption-portfolio problem in a competitive securities market with continuous price dynamics, possibly nontradeable income, and convex trading constraints. We define a class of "translation-invariant" recursive preferences, which includes additive exponential utility, but also nonadditive recursive and multiple-prior formulations, and allows for first and second-order source-dependent risk aversion. For this class, we show that the solution reduces to a single constrained backward stochastic differential equation, which for an interesting class of incomplete-market problems simplifies to a system of ordinary differential equations of the Riccati type.
Original language | English (US) |
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Pages (from-to) | 1-30 |
Number of pages | 30 |
Journal | Stochastic Processes and their Applications |
Volume | 115 |
Issue number | 1 |
DOIs | |
State | Published - Jan 2005 |
Keywords
- BSDE
- FBSDE
- Finance
- Optimal portfolios
- Recursive utility
ASJC Scopus subject areas
- Statistics and Probability
- Modeling and Simulation
- Applied Mathematics