Optimal Decision-Making with Time Diversification

Posted: 4 Mar 2002

See all articles by Paolo Vanini

Paolo Vanini

University of Basel

Luigi Vignola

Deutsche Bank, Zurich Branch

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Abstract

One of the most enduring topics in financial theory is the persistence of investment risk across time. Traditional finance lacks methods for considering and hedging non-diversifiable risks. This paper is based on the general equilibrium model of Allen and Gale (1997). We extend their model in various directions: the intermediary is a firm and not a planner, financial markets are assumed to be incomplete, and the mechanism of intergenerational risk-sharing is endogenously determined. Our model allows for the analysis of optimal behavior of individuals and the intermediary together with the respective feedback processes.

Keywords: Cross-Sectional Risk, Intertemporal Risk-Smoothing, Risk-Sharing, Time Diversification and Incomplete Financial Markets

JEL Classification: G10, G20, D91

Suggested Citation

Vanini, Paolo and Vignola, Luigi, Optimal Decision-Making with Time Diversification. European Finance Review, 2002, Available at SSRN: https://ssrn.com/abstract=297525

Paolo Vanini (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Luigi Vignola

Deutsche Bank, Zurich Branch ( email )

Uraniastrasse 9
Zurich
Switzerland
+41 44 227 33 51 (Phone)

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