Abstract
Motivated by notions of aversion to Knightian uncertainty, this paper develops the theory of competitive asset pricing and consumption/portfolio choice with homothetic recursive preferences that allow essentially any homothetic uncertainty averse certainty-equivalent form. The market structure is scale invariant but otherwise general, allowing any trading constraints that scale with wealth. Technicalities are minimized by assuming a finite information tree. Pricing restrictions in terms of consumption growth and market returns are derived and a simple recursive method for solving the corresponding optimal consumption/portfolio choice problem is established.
Original language | English (US) |
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Pages (from-to) | 431-456 |
Number of pages | 26 |
Journal | Mathematics and Financial Economics |
Volume | 7 |
Issue number | 4 |
DOIs | |
State | Published - Sep 1 2013 |
Keywords
- Ambiguity aversion
- Asset pricing theory
- Knightian uncertainty
- Portfolio theory
- Recursive utility
ASJC Scopus subject areas
- Statistics and Probability
- Finance
- Statistics, Probability and Uncertainty