Optimal Decision-Making with Time Diversification

Paolo Vanini and Luigi Vignola

Review of Finance, 2002, vol. 6, issue 1, 1-30

Abstract: One of the most enduring topics in financial theory is the persistence of investment risk across time. Traditional finance lacks methods for considering and hedging non-diversifiable risks. This paper is based on the general equilibrium model of Allen and Gale (1997). We extend their model in various directions: the intermediary is a firm and not a planner, financial markets are assumed to be incomplete, and the mechanism of intergenerational risk-sharing is endogenously determined. Our model allows for the analysis of optimal behavior of individuals and the intermediary together with the respective feedback processes. JEL classification codes: G10, G20, D91

Date: 2002
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