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Lifetime consumption-portfolio choice under trading constraints, recursive preferences, and nontradeable income


  • Schroder, Mark
  • Skiadas, Costis


We analyze the lifetime consumption-portfolio problem in a competitive securities market with continuous price dynamics, possibly nontradeable income, and convex trading constraints. We define a class of "translation-invariant" recursive preferences, which includes additive exponential utility, but also nonadditive recursive and multiple-prior formulations, and allows for first and second-order source-dependent risk aversion. For this class, we show that the solution reduces to a single constrained backward stochastic differential equation, which for an interesting class of incomplete-market problems simplifies to a system of ordinary differential equations of the Riccati type.

Suggested Citation

  • Schroder, Mark & Skiadas, Costis, 2005. "Lifetime consumption-portfolio choice under trading constraints, recursive preferences, and nontradeable income," Stochastic Processes and their Applications, Elsevier, vol. 115(1), pages 1-30, January.
  • Handle: RePEc:eee:spapps:v:115:y:2005:i:1:p:1-30

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    References listed on IDEAS

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    Cited by:

    1. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated," Journal of Finance, American Finance Association, vol. 62(5), pages 2123-2167, October.
    2. Zvi Bodie & Jérôme Detemple & Marcel Rindisbacher, 2009. "Life-Cycle Finance and the Design of Pension Plans," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 249-286, November.
    3. Holger Kraft & Thomas Seiferling & Frank Thomas Seifried, 2017. "Optimal consumption and investment with Epstein–Zin recursive utility," Finance and Stochastics, Springer, vol. 21(1), pages 187-226, January.
    4. Holger Kraft & Frank Seifried & Mogens Steffensen, 2013. "Consumption-portfolio optimization with recursive utility in incomplete markets," Finance and Stochastics, Springer, vol. 17(1), pages 161-196, January.
    5. Alghalith, Moawia, 2012. "Forward dynamic utility functions: A new model and new results," European Journal of Operational Research, Elsevier, vol. 223(3), pages 842-845.


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