Strategic Consumption-Portfolio Rules and Precautionary Savings with Informational Frictions

Yulei Luo ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper provides a tractable continuous-time CARA-Gaussian framework to explore how the interactions of risk aversion and induced uncertainty due to informational frictions determine strategic consumption-portfolio rules, precautionary savings, and consumption dynamics in the presence of uninsurable labor income. Specifically, after solving the model explicitly, we explore the relative importance of the two types of induced uncertainty: (i) model uncertainty due to robustness and (ii) state uncertainty due to limited information-processing capacity as well as risk aversion in determining asset allocation, precautionary savings, and consumption dynamics. Finally, we discuss how the separation between risk aversion and intertemporal substitution affects strategic asset allocation and precautionary savings.

Keywords: Robustness; Model Uncertainty; Rational Inattention; Uninsurable Labor Income; Strategic Asset Allocation; Precautionary Savings (search for similar items in EconPapers)
JEL-codes: C6 C61 D8 D81 E2 (search for similar items in EconPapers)
Date: 2014-08-23
New Economics Papers: this item is included in nep-dge, nep-mac and nep-upt
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https://mpra.ub.uni-muenchen.de/58126/1/MPRA_paper_58126.pdf revised version (application/pdf)

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