Dynamic asset allocation and consumption with the indirect utility function

Messaoud Chibane and Pierre Six

Finance Research Letters, 2024, vol. 65, issue C

Abstract: Articles about asset allocation rely on the direct utility as a primitive to model the risk appetite of investors and to derive optimal asset allocation and consumption. In a simple setting, we show that the same problem can be solved where the indirect utility function is used as a primitive. Our approach offers various advantages. The indirect utility function measures the satisfaction at optimum and perfectly describes the risk appetite of investors. It is a function of wealth whereas the direct utility function depends on consumption.

Keywords: Indirect utility function; Direct utility function; Risk aversion; Dynamic asset allocation; Consumption; Inverse Optimal Control (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:65:y:2024:i:c:s1544612324005725

DOI: 10.1016/j.frl.2024.105542

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