Optimal Multi-Period Consumption and Investment With Short-Sale Constraints

Abstract

This article examines agents' consumption-investment problem in a multi-period pure exchange economy where agents are constrained with the short-sale of state-dependent risky contingent claims. In equilibrum, agents hold options written on aggregate consumption in their optimal portfolios. Furthermore, under the specific case of quadratic utility, the optimal risk-sharing rule derived for the pricing agent leads to a multifactor conditional consumption-based capital asset pricing model (CCAPM), where excess option returns appear as factors.

Keywords: Options; Optimization; Short-sales; Consumption-based CAPM

JEL Classification: G11; G12; D50