This paper provides a novel five-component decomposition of optimal dynamic portfolio choice. It reveals the simultaneous impacts from market incompleteness and wealth-dependent utilities. The decomposition leads to implementation via either closed-form solutions or Monte Carlo simulations. With...

We study consumption-portfolio and asset pricing frameworks with recursive preferences and unspanned risk. We show that in both cases, portfolio choice and asset pricing, the value function of the investor/representative agent can be characterized by a specific semilinear partial differential...

In dynamic portfolio choice problems, stochastic state variables such as stochastic volatility lead to adjustments of the optimal stock demand referred to as hedge terms or Merton-Breeden terms. By deriving an explicit solution in a multi-agent framework with a stochastic opportunity set, we...

In an incomplete market we study the optimal consumption-portfolio decision of an investor with recursive preferences of Epstein-Zin type. Applying a classical dynamic programming approach, we formulate the associated Hamilton-Jacobi-Bellman equation and provide a suitable verification theorem....

We investigate the dynamics of the relationship between returns and extreme downside risk in different states of the market by combining the framework of Bali, Demirtas, and Levy (2009) with a Markov switching mechanism. We show that the risk-return relationship identified by Bali, Demirtas, and...

We show that the net corporate payout yield predicts both the stock market index and house prices and that the log home rent-price ratio predicts both house prices and labor income growth. We incorporate the predictability in a rich life-cycle model of household decisions involving consumption...

In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we disentangle the welfare effects of skill and luck. Skilled investors are able to take advantage of all sources of predictability, whereas unskilled investors ignore predictability. Lucky...

We develop and implement methods for determining whether introducing new securities or relaxing investment constraints improves the investment opportunity set for prospect investors. We formulate a new testing procedure for prospect spanning for two nested portfolio sets based on subsampling and...

Using properties of the cdf of a random variable defined as a saddle-type point of a real valued continuous stochastic process, we derive first-order asymptotic properties of tests for stochastic spanning w.r.t. a stochastic dominance relation. First, we define the concept of Markowitz...

We provide explicit solutions to life-cycle utility maximization problems simultaneously involving dynamic decisions on investments in stocks and bonds, consumption of perishable goods, and the rental and the ownership of residential real estate. House prices, stock prices, interest rates, and...