Lifetime consumption-portfolio choice under trading constraints, recursive preferences, and nontradeable income

Mark Schroder and Costis Skiadas

Stochastic Processes and their Applications, 2005, vol. 115, issue 1, 1-30

Abstract: We analyze the lifetime consumption-portfolio problem in a competitive securities market with continuous price dynamics, possibly nontradeable income, and convex trading constraints. We define a class of "translation-invariant" recursive preferences, which includes additive exponential utility, but also nonadditive recursive and multiple-prior formulations, and allows for first and second-order source-dependent risk aversion. For this class, we show that the solution reduces to a single constrained backward stochastic differential equation, which for an interesting class of incomplete-market problems simplifies to a system of ordinary differential equations of the Riccati type.

Keywords: Finance; Optimal; portfolios; Recursive; utility; BSDE; FBSDE (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (12)

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