Consumption optimization for recursive utility in a jump-diffusion model

Fabio Antonelli () and Carlo Mancini ()
Additional contact information
Fabio Antonelli: University of L’Aquila
Carlo Mancini: University of L’Aquila

Decisions in Economics and Finance, 2016, vol. 39, issue 2, No 7, 293-310

Abstract: Abstract In this paper, we consider a market model with prices and consumption following a jump-diffusion dynamics. In this setting, we first characterize the optimal consumption plan for an investor with recursive stochastic differential utility on the basis of his/her own beliefs, then we solve the inverse problem to find what beliefs make a given consumption plan optimal. The problem is viewed in general for a class of homogeneous recursive utility, and later we choose a logarithmic model for the utility aggregator as an explicitly computable example. When beliefs, represented via Girsanov’s theorem, get incorporated into the model, the change of measure gives rise, up to a transformation, to a backward stochastic differential equation whose generator exhibits a quadratic behavior in the Brownian component and a locally Lipschitz one in the jump component, which is solvable on the basis of some recent results.

Keywords: BSDEs; Jump-diffusion processes; Recursive utility; Consumption process; Homogeneity; Inverse problem (search for similar items in EconPapers)
JEL-codes: C02 G11 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10203-016-0177-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:decfin:v:39:y:2016:i:2:d:10.1007_s10203-016-0177-1

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/10203/PS2

DOI: 10.1007/s10203-016-0177-1

Access Statistics for this article

Decisions in Economics and Finance is currently edited by Paolo Ghirardato

More articles in Decisions in Economics and Finance from Springer, Associazione per la Matematica
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().