2016
DOI: 10.1007/s00780-016-0297-z
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Consumption–investment optimization with Epstein–Zin utility in incomplete markets

Abstract: Abstract. In a market with stochastic investment opportunities, we study an optimal consumption investment problem for an agent with recursive utility of Epstein-Zin type. Focusing on the empirically relevant specification where both risk aversion and elasticity of intertemporal substitution are in excess of one, we characterize optimal consumption and investment strategies via backward stochastic differential equations. The supperdifferential of indirect utility is also obtained, meeting demands from applicat… Show more

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Cited by 39 publications
(125 citation statements)
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“…(, equation ), Kraft et al. (, theorem 6.1), and Xing (, equation ) for Markovian models. The form of D can be obtained via the utility gradient approach; cf.…”
Section: Resultsmentioning
confidence: 99%
See 3 more Smart Citations
“…(, equation ), Kraft et al. (, theorem 6.1), and Xing (, equation ) for Markovian models. The form of D can be obtained via the utility gradient approach; cf.…”
Section: Resultsmentioning
confidence: 99%
“…Proposition Let the filtration false(Ftfalse)0tT be the augmented filtration generated by some Brownian motion. (i)(Schroder & Skiadas, , theorem 1) When either γ>1,0<ψ<1, or 0<γ<1,ψ>1, for any cC such that 0truedouble-struckEfalse[0Tctdt+cTfalse]< for all R, there exists a unique Uc such that E[ ess sup t|Utcfalse|]< for every >0. (ii)(Xing, , propositions 2.2 and 2.4) When γ,ψ>1, for any cC such that 0truedouble-struckEfalse[0Tct11/ψdt+cT1γfalse]<, there exists a unique Uc of class (D). For general filtration false(Ftfalse)0tT, (iii)(Seiferling & Seifried, , theorems 3.1 and 3.3) When γψ1,ψ>1, or γψ1,ψ<1...…”
Section: Consumption Investment Optimization and Its Dualmentioning
confidence: 99%
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“…Recursive utilities have proved useful in a variety of different contexts, ranging from asset pricing, to monetary economics, business cycles and growth, and decision theory. There is an established and growing literature on optimal investment and consumption with recursive utility in frictionless models (see, e.g., Chacko & Viceira, 2005; Kraft, Seiferling, & Seifried 2017; Schroder & Skiadas, 1999; Xing, 2017). In contrast, the analysis of such models in the presence of transaction costs is virtually unchartered territory beyond the numerical studies of Jang, Koo, and Lee (2015) and Buss, Uppal, and Vilkov (2013).…”
Section: Introductionmentioning
confidence: 99%