Scale-invariant asset pricing and consumption/portfolio choice with general attitudes toward risk and uncertainty

Costis Skiadas*

*Corresponding author for this work

Research output: Contribution to journalArticle

2 Scopus citations

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 languageEnglish (US)
Pages (from-to)431-456
Number of pages26
JournalMathematics and Financial Economics
Volume7
Issue number4
DOIs
StatePublished - 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

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