Additive habit formation: Consumption in incomplete markets with random endowments

Details Additive habit formation: Consumption in incomplete markets with random endowments Additive habit formation: Consumption in incomplete markets with random endowments

2011-06-15

arxiv.org/abs/1106.2980v2

Mathematics and Financial Economics 5(2), 67--99, 2011

Economy

Quantitative Finance

Portfolio Management

To appear in Mathematics and Financial Economics

Scientific paper

We provide a detailed characterization of the optimal consumption stream for the additive habit-forming utility maximization problem, in a framework of general discrete-time incomplete markets and random endowments. This characterization allows us to derive the monotonicity and concavity of the optimal consumption as a function of wealth, for several important classes of incomplete markets and preferences. These results yield a deeper understanding of the fine structure of the optimal consumption and provide a further theoretical support for the classical conjectures of Keynes (1936).

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