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Expected Life-Time Utility and Hedging Demands in a Partially Observable Economy

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Author

  • Frederik Lundtofte

Summary, in English

This paper analyzes the expected life-time utility and the hedging demands in an exchange only, representative agent general equilibrium under incomplete information. We derive an expression for the investor's expected life-time utility, and analyze his hedging demands for intertemporal changes in the stochastic unobservable growth of the endowment process and the changing quality of information regarding these changes. The hedging demands consist of two components, which could work in opposite directions so that a conservative consumer may end up having positive hedging demands. Our results are qualitatively different from those prevailing under constant growth (cf. [Brennan, M.J., 1998. The role of learning in dynamic portfolio decisions. European Finance Review, 1, 295–306; Ziegler, A., 2003. Incomplete Information and Heterogeneous Beliefs in Continuous-Time Finance. Springer, Berlin, Chapter 2].

Publishing year

2008

Language

English

Pages

1072-1096

Publication/Series

European Economic Review

Volume

52

Issue

6

Document type

Journal article

Publisher

Elsevier

Topic

  • Economics

Keywords

  • Learning
  • Incomplete information
  • Equilibrium
  • Hed

Status

Published

ISBN/ISSN/Other

  • ISSN: 1873-572X