Optimal lifetime consumption-portfolio strategies under trading constraints and generalized recursive preferences

Mark Schroder, Costis Skiadas*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

48 Scopus citations

Abstract

We consider the lifetime consumption-portfolio problem in a competitive securities market with essentially arbitrary continuous price dynamics, and convex trading constraints (e.g., incomplete markets and short-sale constraints). Abstract first-order conditions of optimality are derived, based on a preference-independent notion of constrained state pricing. For homothetic generalized recursive utility, we derive closed-form solutions for the optimal consumption and trading strategy in terms of the solution to a single constrained BSDE. Incomplete market solutions are related to complete markets solutions with modified risk aversion towards non-marketed risk. Methodologically, we develop the utility gradient approach, but for the homothetic case we also verify the solution using the dynamic programming approach, without having to assume a Markovian structure. Finally, we present a class of parametric examples in which the BSDE characterizing the solution reduces to a system of Riccati equations.

Original languageEnglish (US)
Pages (from-to)155-202
Number of pages48
JournalStochastic Processes and their Applications
Volume108
Issue number2
DOIs
StatePublished - Dec 2003

ASJC Scopus subject areas

  • Statistics and Probability
  • Modeling and Simulation
  • Applied Mathematics

Fingerprint

Dive into the research topics of 'Optimal lifetime consumption-portfolio strategies under trading constraints and generalized recursive preferences'. Together they form a unique fingerprint.

Cite this