Optimal decision-making with time diversification
The authors expand upon the traditional approach by considering optimal decision on the part of individuals and intermediaries where cross-sectional and longitudinal risk sharing is allowed. A truly incomplete financial market is considered. There are one risk-free asset and two risky assets. The interme diary, who lives for an infinite number of periods, optimizes her expected utility, while at the same time offering intertemporal smoothing of consumption and incentive-compatible risk-sharing contracts to the individuals. These ones, who are OLG agents living for a finite number of periods, maximize the expected utility while at the same time financing the optimal consumption path. The authors work in a partial equilibrium framework. Results: Poor individuals have a stronger incentive to share risks accross the generations that rich ones. They invest more in both risky assets, whereas the rich prefer to invest in the safe asset.
- Consumption and Portfolio Decisions when Expected Returns are Time Varying
- Optimal sharing rule for a household with a portfolio management problem
- Investment, consumption and hedging with lump-sum payoff in finite horizon under incomplete market
- The investment horizon problem: a possible resolution
- Proof by certainty equivalents that diversification-across-time does worse, risk corrected, than diversification-throughout-time
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