Download or read book Optimal Consumption and Savings with Stochastic Income and Recursive Utility written by Chong Wang and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a tractable incomplete-markets model with an earnings process Y subject to permanent shocks and borrowing constraints. Financial frictions cause the marginal (certainty equivalent) value of wealth W to be greater than unity and decrease with liquidity w = W/Y . Additionally, financial frictions cause consumption to decrease with this endogenously determined marginal value of liquidity. Risk aversion and the elasticity of inter-temporal substitution play very different roles on consumption and the dispersion of w. Permanent earnings shocks, especially large discrete stochastic jumps, make consumption smoothing quantitatively difficult to achieve. Borrowing constraints and permanent discrete jump shocks can generate empirically plausible values for marginal propensities to consume in the range of 0.2 to 0.6.
Download or read book Optimal Consumption and Savings with Stochastic Income written by Chong Wang and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop an analytically tractable consumption-savings model for a liquidity-constrained agent who faces both permanent and transitory income shocks. We find that risk aversion and intertemporal substitution have very different effects on both consumption and the steady-state savings target. Moderate changes in risk aversion have large effects on consumption and buffer-stock savings. With permanent shocks, it takes many years to reach the steady-state savings target. We also find that large discrete income shocks (jumps) occurring at low frequencies can be very costly. Unlike conventional wisdom, transitory shocks can generate very large precautionary savings demand, especially for low transitory income states.
Download or read book Optimal Consumption and Investment with Epstein Zin Recursive Utility written by Holger Kraft and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study continuous-time optimal consumption and investment with Epstein-Zin recursive preferences in incomplete markets. We develop a novel approach that rigorously constructs the solution of the associated Hamilton-Jacobi-Bellman equation by a fixed point argument and makes it possible to compute both indirect utility and, more importantly, optimal strategies. Based on these results, we also establish a fast and accurate method for numerical computations. Our setting is not restricted to affine asset price dynamics; we only require boundedness of the underlying model coefficients.
Download or read book Consumption Decisions with Stochastic Wage Income written by Fuchun Jin and published by . This book was released on 1998 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, I use an approximate solution to model the optimal consumption when the representative consumer faces labor income uncertainty. This approximate consumption function is based on Zeldes' (1989) numerical solution to the optimal consumption problem with CRRA utility and stochastic labor income. Unlike the certainty equivalence solution, this model assumes that the consumer discounts expected future labor income at a rate higher than the real interest rate. It therefore takes into consideration the precautionary savings of the consumer. The first order implications of the approximate consumption function, with and without the liquidity constrained consumers, are tested using quarterly UDS data. The evidence lends support to the claims of the approximate consumption function, particularly when liquidity constrained consumers are included. The empirical results of this paper imply that current consumption should be Granger caused by variables in the lagged information set. Meanwhile, consumption should be smoother than labor income, even when the latter follows an integrated process. Both implications have been documented in the literature. Based on this evidence, I conclude that the approximate model is a promising way of getting around the difficulties involved in obtaining a closed form solution when utility is of the general decreasing absolute risk aversion type.
Download or read book Optimal Consumption with Stochastic Income written by Stephen Paul Zeldes and published by . This book was released on 1984 with total page 310 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Consumption Investment Optimization with Epstein Zin Utility in Incomplete Markets written by Hao Xing and published by . This book was released on 2015 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Notes on Consumption Theory written by Giuseppe Travaglini and published by Springer Nature. This book was released on with total page 157 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Optimal Consumption with an Exponential Utility Function written by Alexander Charles Ratnofsky and published by . This book was released on 1973 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper develops a model for the determination of an individual's optimal consumption strategy when he is faced with a stochastic income stream. With the use of an exponential utility function an upper bound on optimal consumption is found. This upper bound is found to increase as future income becomes more certain. The optimal amount to consume when all future income is deterministic is also found. Finally, examples are given to illustrate the results obtained and to highlight the importance of the selection of the various parameters. (Author).
Download or read book Optimal Consumption and Portfolio Selection with Stochastic Differential Utility written by Mark D. Schroder and published by . This book was released on 1999 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops the utility gradient (or martingale) approach for computing portfolio and consumption plans that maximize stochastic differential utility (SDU), a continuous-time version of recursive utility due to Duffie and Epstein (1992a). The setting is that of a general stochastic investment opportunity set with Brownian information (making some of the results novel in the time-additive case, as well). We characterize the first order conditions of optimality as a system of forward-backward SDE's, and for the Markovian case we show how to solve this system in terms of a system of quasilinear parabolic PDE's and forward only SDE's, which is amenable to numerical computation. Another contribution is a proof of existence, uniqueness, and basic properties for a parametric class of homothetic SDU that can be thought of as a continuous-time version of the CES Kreps-Porteus utilities studied by Epstein and Zin (1989). For this class, we show that the solution method simplifies significantly, resulting in closed form solutions in terms of a single backward SDE (without imposing a Markovian structure). The latter can be easily computed, as we will illustrate with a number of tractable concrete examples involving the type of quot;affinequot; state price dynamics that are familiar from the term structure literature.
Download or read book Optimal Consumption with Stochastic Income written by Stephen P. Zeldes and published by . This book was released on 1986 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Optimal Consumption with a Stochastic Income Stream written by Bruce L. Miller and published by . This book was released on 1972 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper investigates the optimal consumption strategies of an individual facing a stochastic labor and deterministic capital income stream over an infinite horizon. The main result of the paper is a theorem showing that the optimal amount to consume in the stochastic income case is always less than the optimal amount to consume in the deterministic case where the stochastic income received each period is replaced by its mean. (Author).
Download or read book The Life Cycle Model with Recursive Utility written by Knut K. Aase and published by . This book was released on 2016 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze optimal consumption, including pensions, during the life time of a consumer using the life cycle model, when the consumer has recursive utility. The model framework is that of continuous-time with diffusion driven uncertainty. The relationship between substitution of consumption and risk aversion is highlighted, and clarified in the context of the life cycle model. We find the optimal consumption in closed form, and illustrate that the recursive utility consumer may prefer to smooth consumption shocks across time and states of the world. This agent consumes and invests to mitigate shocks to the economy, in situations where the conventional consumer is just myopic. This has consequences for what products the financial industry may choose to offer. The resulting model can be used to explain empirical puzzles for aggregates, indicating a plausible choice for the parameters of the utility function, for for the 'average' consumer in the context of life cycle model.
Download or read book Saving Behavior in a Pure Life cycle Model with Income Uncertainty written by Ian Irvine and published by Department of Economics, Concordia University. This book was released on 1995 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Life Cycle Consumption with Recursive Utility written by Larry G. Epstein and published by . This book was released on 1981 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Optimal Consumption for Recursive Preferences with Local Substitution written by Hanwu Li and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We characterize optimal consumption policies in a recursive intertemporal utility framework with local substitution. We establish existence and uniqueness and a version of the Kuhn-Tucker theorem characterizing the optimal consumption plan. An explicit solution is provided for the case when the felicity function is of the Epstein-Zin's type.
Download or read book Optimal Investment and Consumption Under Infinite Horizon Epstein Zin Stochastic Differential Utility written by Joseph Jerome and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Consumption Adjustment Under Changing Income Uncertainty written by Joon-Ho Hahm and published by . This book was released on 1998 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:
