Asset pricing and consumption-portfolio choice with recursive utility and unspanned risk : [version 1 june 2014]
- We study consumption-portfolio and asset pricing frameworks with recursive preferences and unspanned risk. We show that in both cases, portfolio choice and asset pricing, the value function of the investor/representative agent can be characterized by a specific semilinear partial differential equation. To date, the solution to this equation has mostly been approximated by Campbell-Shiller techniques, without addressing general issues of existence and uniqueness. We develop a novel approach that rigorously constructs the solution by a fixed point argument. We prove that under regularity conditions a solution exists and establish a fast and accurate numerical method to solve consumption-portfolio and asset pricing problems with recursive preferences and unspanned risk. Our setting is not restricted to affine asset price dynamics. Numerical examples illustrate our approach.
| Author: | Holger KraftGND, Thomas Seiferling, Frank Thomas SeifriedGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-341801 |
| URL: | http://ssrn.com/abstract=2444747 |
| DOI: | https://doi.org/10.2139/ssrn.2444747 |
| Parent Title (German): | SAFE working paper series ; No. 52 |
| Series (Serial Number): | SAFE working paper (52) |
| Publisher: | SAFE |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2014 |
| Year of first Publication: | 2014 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2014/06/17 |
| Tag: | FBSDE; asset pricing; consumption-portfolio choice; fixed point approach; incomplete markets; stochastic differential utility |
| Issue: | vers. June 1, 2014 |
| Page Number: | 51 |
| Note: | Date: first version: March 6, 2014; this version: June 1, 2014. |
| HeBIS-PPN: | 348925611 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
