Recursive utility using the stochastic maximum principle
Knut K. Aase
Quantitative Economics, 2016, vol. 7, issue 3, 859-887
Motivated by the problems of the conventional model in rationalizing market data, we derive the equilibrium interest rate and risk premiums using recursive utility in a continuous‐time model. We use the stochastic maximum principle to analyze the model. This method uses forward/backward stochastic differential equations, and works when the economy is not Markovian, which can be the case with recursive utility. With existence granted, the wealth portfolio is characterized in equilibrium in terms of utility and aggregate consumption. The equilibrium real interest rate is derived, and the resulting model is shown to be consistent with reasonable values of the parameters of the utility function when calibrated to market data, under various assumptions.
References: Add references at CitEc
Citations Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wly:quante:v:7:y:2016:i:3:p:859-887
Ordering information: This journal article can be ordered from
Access Statistics for this article
More articles in Quantitative Economics from Econometric Society Contact information at EDIRC.
Series data maintained by Wiley-Blackwell Digital Licensing ().