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Intertemporal Cost-efficient Consumption

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  • Mauricio Elizalde
  • Stephan Sturm

Abstract

We aim to provide an intertemporal, cost-efficient consumption model that extends the consumption optimization inspired by the Distribution Builder, a tool developed by Sharpe, Johnson, and Goldstein. The Distribution Builder enables the recovery of investors' risk preferences by allowing them to select a desired distribution of terminal wealth within their budget constraints. This approach differs from the classical portfolio optimization, which considers the agent's risk aversion modeled by utility functions that are challenging to measure in practice. Our intertemporal model captures the dependent structure between consumption periods using copulas. This strategy is demonstrated using both the Black-Scholes and CEV models.

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  • Mauricio Elizalde & Stephan Sturm, 2024. "Intertemporal Cost-efficient Consumption," Papers 2405.16336, arXiv.org.
    • Handle: RePEc:arx:papers:2405.16336
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    References listed on IDEAS

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    7. Daniel G. Goldstein & Eric J. Johnson & William F. Sharpe, 2008. "Choosing Outcomes versus Choosing Products: Consumer-Focused Retirement Investment Advice," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 35(3), pages 440-456, August.
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