Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/100809 
Year of Publication: 
1999
Series/Report no.: 
Working Paper No. 99-17
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
When preferences are homothetic, utility can be expressed in terms of current consumption and a variable that captures all information about future opportunities. We use this observation to express the differential equation that characterizes utility as a restriction on the information variable in terms of the dynamics of consumption. We derive the supporting price system and returns process and thereby characterize optimal consumption and portfolio decisions. We provide a fast and accurate numerical solution method and illustrate its use with a number of Markovian models. In addition, we provide insight by changing the numeraire from units of consumption to units of the consumption process. In terms of the new units, the wealth-consumption ratio (which is closely related to the information variable) is the value of a coupon bond and the existence of an infinite-horizon solution depends on the positivity of the asymptotic forward rate.
Subjects: 
Asset pricing
Consumption (Economics)
Interest rates
Wealth
Document Type: 
Working Paper

Files in This Item:
File
Size
451.58 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.