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Expected Life-Time Utility and Hedging Demands in a Partially Observable Economy

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  • Frederik Lundtofte

    (Swiss Institute of Banking and Finance, University of St-Gallen)

Abstract

This paper analyzes the expected life-time utility and the hedging demands in an exchange only, representative agent general equilibrium under incomplete information. We derive an expression for the investor’s expected life-time utility, and analyze his hedging demands for intertemporal changes in the unobservable stochastic growth of the endowment process and the changing quality of information regarding these changes. The hedging demands consist of two components, which could work in opposite directions so that a conservative consumer may end up having positive hedging demands. Our results are qualitatively different from those within constant growth equilibria.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 06-23.

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Length: 41 pages
Date of creation: Nov 2003
Date of revision: Oct 2006
Handle: RePEc:chf:rpseri:rp0623

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Keywords: learning; incomplete information; equilibrium; hedging demands;

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Cited by:
  1. Gau, Yin-Feng & Hua, Mingshu & Wu, Wen-Lin, 2010. "International asset allocation for incompletely-informed investors," Journal of Financial Markets, Elsevier, vol. 13(4), pages 422-447, November.
  2. Liu, Hening, 2011. "Dynamic portfolio choice under ambiguity and regime switching mean returns," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 623-640, April.

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