Estimating Consumption Plans for Recursive Utility by Maximum Entropy Methods
AbstractWe derive and estimate the optimal disbursement from an infinitely-lived charitable trust with an Epstein-Zin-Weil utility function, given general Markovian returns to wealth. We analyze two special cases: where spending is a power function of last period's wealth and the endowment uses 'payout smoothing'. Via nonlinear least squares, we estimate the optimal spending rate and the elasticity of intertemporal substitution for a trust with a typical diversified portfolio and for a portfolio of hedge funds. Finally, we use maximum entropy methods to characterize the returns distribution of a trust whose spending plan conforms with the optimality condition.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 300.
Date of creation: 01 Jan 2012
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Intertemporal choice; Elasticity of intertemporal substitution; Moving average;
Find related papers by JEL classification:
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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