Abstract
Abstract This chapter presents a theory of optimal lifetime consumption-portfolio choice in a continuous information setting, with emphasis on the modeling of risk aversion through generalized recursive utility. A novel contribution is a decision theoretic development of the notions of source-dependent first- or second-order risk aversion. Backward stochastic differential equations (BSDEs) are explained heuristically as continuous-information versions of backward recursions on an information tree, and are used to formulate utility functions as well as optimality conditions. The role of scale invariance and quadratic BSDEs in obtaining tractable solutions is explained. A final section outlines extensions, including optimality conditions under trading constraints, and tractable formulations with nontradeable income.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: Handbooks in Operations Research and Management Science
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
