Consumption-investment optimization with Epstein-Zin utility in incomplete markets

DOI10.1007/S00780-016-0297-ZzbMATH Open1352.93107arXiv1501.04747OpenAlexW3123163976MaRDI QIDQ503396FDOQ503396

Authors: Hao Xing 

Publication date: 12 January 2017

Published in: Finance and Stochastics (Search for Journal in Brave)

Abstract: In a market with stochastic investment opportunities, we study an optimal consumption investment problem for an agent with recursive utility of Epstein-Zin type. Focusing on the empirically relevant specification where both risk aversion and elasticity of intertemporal substitution are in excess of one, we characterize optimal consumption and investment strategies via backward stochastic differential equations. The supperdifferential of indirect utility is also obtained, meeting demands from applications in which Epstein-Zin utilities were used to resolve several asset pricing puzzles. The empirically relevant utility specification introduces difficulties to the optimization problem due to the fact that the Epstein-Zin aggregator is neither Lipschitz nor jointly concave in all its variables.

Full work available at URL: https://arxiv.org/abs/1501.04747

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zbMATH Keywords

backward stochastic differential equationconsumption-investment optimizationEpstein-Zin utility

Mathematics Subject Classification ID

Portfolio theory (91G10) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Optimal stochastic control (93E20)

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Cited In (24)

• Risk-based optimal portfolio of an insurance firm with regime switching and noisy memory
• Optimal consumption and portfolio selection with Epstein-Zin utility under general constraints
• Optimal investment and benefit adjustment problem for a target benefit pension plan with Cobb-Douglas utility and Epstein-Zin recursive utility
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• The infinite-horizon investment-consumption problem for Epstein-Zin stochastic differential utility. II: Existence, uniqueness and verification for \(\vartheta \in (0,1)\)
• Convex duality for Epstein-Zin stochastic differential utility
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• Optimal pair trading: consumption-investment problem with finite and infinite horizon
• Stability of the Epstein-Zin problem
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• Optimal consumption-investment with constraints in a regime switching market with random coefficients
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• Optimal investment and consumption with labor income in incomplete markets
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• Co-jumps and recursive preferences in portfolio choices
• Mortality and Healthcare: A Stochastic Control Analysis under Epstein--Zin Preferences
• Consumption and portfolio optimization with generalized stochastic differential utility in incomplete markets

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