Efficient Consumption Set Under Recursive Utility and Unknown Beliefs
In a context of complete financial markets where asset prices follow Ito's processes, we characterize the set of consumption processes which are optimal for a given stochastic differential utility (e.g. Duffie and Epstein (1992)) when beliefs are unknown. Necessary and sufficient conditions for the efficiency of a consumption process, consists of the existence of a solution to a quadratic backward stochastic differential equation and a martingale condition. We study the efficiency condition in the case of a class of homothetic stochastic differential utilities and derive some results for those particular cases. In a Markovian context, this efficiency condition becomes a partial differential equation.
|Date of creation:||01 Jun 2002|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.qfrc.uts.edu.au/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- P.A. Chiappori & I. Ekeland & F. Kubler & H.M. Polemarchakis, 2002.
"Testable Implications of General Equilibrium Theory: a differentiable approach,"
2002-10, Brown University, Department of Economics.
- Chiappori, P. -A. & Ekeland, I. & Kubler, F. & Polemarchakis, H. M., 2004. "Testable implications of general equilibrium theory: a differentiable approach," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 105-119, February.
- Bick, Avi, 1990. " On Viable Diffusion Price Processes of the Market Portfolio," Journal of Finance, American Finance Association, vol. 45(2), pages 673-89, June.
- Duffie, Darrell & Epstein, Larry G, 1992. "Stochastic Differential Utility," Econometrica, Econometric Society, vol. 60(2), pages 353-94, March.
- He, Hua & Leland, Hayne, 1993. "On Equilibrium Asset Price Processes," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 593-617.
- Bick, Avi, 1987. "On the Consistency of the Black-Scholes Model with a General Equilibrium Framework," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(03), pages 259-275, September.
- Cuoco, Domenico & Zapatero, Fernando, 2000. "On the Recoverability of Preferences and Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 417-31.
- Duffie, Darrell & Skiadas, Costis, 1994. "Continuous-time security pricing : A utility gradient approach," Journal of Mathematical Economics, Elsevier, vol. 23(2), pages 107-131, March.
When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:85. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford)
If references are entirely missing, you can add them using this form.