Herdegen, Martin P.G.
- Working Paper
We study the sensitivity of optimal consumption streams with respect to perturbations of the random endowment. At the leading order, the consumption adjustment does not matter: any choice that matches the budget constraint simply shifts the original utility by the marginal value of the perturbation. Nontrivial results obtain at the next-to-leading order. Here, one first solves the problem for a deterministic perturbation, which leads to a “prognosis measure”. The desired consumption adjustment for a general endowment perturbation is in turn given by the conditional expectation of the latter, computed under this measure and appropriately weighted with the conditional expectations of the remaining risk-tolerance Show more
Journal / seriesSwiss Finance Institute Research Paper
PublisherUniversity of Geneva
SubjectOptimal consumption; Random endowment; Asymptotic analysis
Organisational unit03899 - Muhle-Karbe, Johannes (ehemalig)
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