Optimal Consumption with Intertemporal Substitution under Knightian Uncertainty

Giorgio Ferrari, Hanwu Li and Frank Riedel
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Giorgio Ferrari: Center for Mathematical Economics, Bielefeld University
Hanwu Li: Center for Mathematical Economics, Bielefeld University

No 641, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: We study an intertemporal consumption and portfolio choice problem under Knightian uncertainty in which agent's preferences exhibit local intertemporal substitution. We also allow for market frictions in the sense that the pricing functional is nonlinear. We prove existence and uniqueness of the optimal consumption plan, and we derive a set of sufficient first-order conditions for optimality. With the help of a backward equation, we are able to determine the structure of optimal consumption plans. We obtain explicit solutions in a stationary setting in which the financial market has different risk premia for short and long positions.

Keywords: Hindy-Huang-Kreps preferences; Knightian uncertainty; g-expectation; ambiguity aversion; singular stochastic control (search for similar items in EconPapers)
Pages: 27
Date: 2020-11-23
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:641

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