Estimating Consumption Plans for Recursive Utility by Maximum Entropy Methods

Stephen Satchell, Susan Thorp and Oliver Williams
Additional contact information
Stephen Satchell: Trinity College, University of Cambridge
Oliver Williams: Scalpel Research and Kings College, University of Cambridge

No 300, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We derive and estimate the optimal disbursement from an infinitely-lived charitable trust with an Epstein-Zin-Weil utility function, given general Markovian returns to wealth. We analyze two special cases: where spending is a power function of last period's wealth and the endowment uses 'payout smoothing'. Via nonlinear least squares, we estimate the optimal spending rate and the elasticity of intertemporal substitution for a trust with a typical diversified portfolio and for a portfolio of hedge funds. Finally, we use maximum entropy methods to characterize the returns distribution of a trust whose spending plan conforms with the optimality condition.

Keywords: Intertemporal choice; Elasticity of intertemporal substitution; Moving average (search for similar items in EconPapers)
JEL-codes: D81 D91 E21 G23 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2012-01-01
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:300

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