Sensitivity of optimal consumption streams

Martin Herdegen and Johannes Muhle-Karbe

Stochastic Processes and their Applications, 2019, vol. 129, issue 6, 1964-1992

Abstract: We study the sensitivity of optimal consumption streams with respect to perturbations of the random endowment. At the leading order, the consumption adjustment does not matter: any choice that matches the budget constraint simply shifts the original utility by the marginal value of the perturbation. Nontrivial results can be obtained by considering the next-to-leading order. Here, one first solves the problem for a deterministic perturbation, which leads to a “prognosis measure”. The desired consumption adjustment for a general endowment perturbation is in turn given by the conditional expectation of the latter, computed under this measure and appropriately weighted with the conditional expectations of the remaining risk-tolerance.

Keywords: Optimal consumption; Random endowment; Asymptotic analysis (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1016/j.spa.2018.06.011

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