Expected Life-Time Utility and Hedging Demands in a Partially Observable Economy
This paper analyzes the expected life-time utility and the hedging demands in a Lucas (1978) economy, in which the dividend drift term is unknown and mean-reverting. An expression for the individual investor’s expected life-time utility in equilibrium is derived, and his hedging demand is analyzed. The hedging demand consists of two components, which could work in opposite directions so that a conservative investor may end up having a positive hedging demand. Interestingly, this differs from the theoretical findings in Brennan (1998), who analyzes the portfolio choice problem of an agent who learns about a constant expected stock return.
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|Date of creation:||24 Feb 2005|
|Date of revision:|
|Publication status:||Published in European Economic Review, 2008, pages 1072-1096.|
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