Scale-invariant asset pricing and consumption/portfolio choice with general attitudes toward risk and uncertainty (Q367371): Difference between revisions

In the introduction a context for this study is established, pointing out how the article relates to an established field of research. This section also provides a rich list of references. Calculations are performed in the framework of a finite information tree. A useful scale invariant recursive utility form is constructed. One of the contributions of the paper is to relax the assumption of an expected-utility CE, allowing for any style of scale-invariant trading constraint. The author exploits a variational approach, which allows one to detach the analysis of the market and the analysis of preferences. Let \(V\) be defined by the process \[ V_t = E\left[\sum_{s=t}^T \frac{\pi_s}{\pi_t} c_s\right], \] where \(\pi\) is a SPD, \(V_t\) represents the cum-dividend time-\(t\) value of a traded contract that generates \(c\) as a dividend process. Suppose the consumption plan \(c\) is financed by the allocation policy \(\left(\rho,\psi\right)\), which generates the wealth process \(W\). Following a central result, \(V=W\) if and only if \(\pi\) is a SPD at \(c\) relative to the market generated by varying \(\rho\), but not \(\psi\). A latter section, `Pricing with SI recursive utility', is central to the article giving pricing results in terms of consumption and market returns. The author illustrates many of the results with motivating examples.