Lifetime consumption-portfolio choice under trading constraints, recursive preferences, and nontradeable income

Mark Schroder, Costis Skiadas*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

21 Scopus citations

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 languageEnglish (US)
Pages (from-to)1-30
Number of pages30
JournalStochastic Processes and their Applications
Volume115
Issue number1
DOIs
StatePublished - Jan 2005

Keywords

  • BSDE
  • FBSDE
  • Finance
  • Optimal portfolios
  • Recursive utility

ASJC Scopus subject areas

  • Statistics and Probability
  • Modeling and Simulation
  • Applied Mathematics

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