Optimal Consumption and Investment with Epstein-Zin Recursive Utility
40 Pages Posted: 15 Apr 2014 Last revised: 4 Jul 2016
Date Written: July 4, 2016
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.
Keywords: consumption-portfolio choice, asset pricing, stochastic differential utility, incomplete markets, FBSDE
JEL Classification: G11, G12, D52, D91, C61, C68
Suggested Citation: Suggested Citation