Sensitivity of Optimal Consumption Streams

Martin Herdegen and Johannes Muhle-Karbe
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Martin Herdegen: ETH Zurich
Johannes Muhle-Karbe: ETH Zurich and Swiss Finance Institute

No 15-27, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study the sensitivity of optimal consumption streams with respect to perturbations of the random endowment. At the leading order, the consumption adjustment does not matter: any choice that matches the budget constraint simply shifts the original utility by the marginal value of the perturbation. Nontrivial results obtain at the next-to-leading order. Here, one first solves the problem for a deterministic perturbation, which leads to a "prognosis measure". The desired consumption adjustment for a general endowment perturbation is in turn given by the conditional expectation of the latter, computed under this measure and appropriately weighted with the conditional expectations of the remaining risk-tolerance.

Keywords: optimal consumption; random endowment; asymptotic analysis (search for similar items in EconPapers)
JEL-codes: D91 E21 G11 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2015-08
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1527

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