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Estimating Consumption Plans for Recursive Utility by Maximum Entropy Methods

Author

Listed:
  • Stephen Satchell

    (Trinity College, University of Cambridge)

  • Susan Thorp

    (University of Sydney)

  • Oliver Williams

    (Scalpel Research and Kings College, University of Cambridge)

Abstract

We derive and estimate the optimal disbursement from an infinitely-lived charitable trust with an Epstein-Zin-Weil utility function, given general Markovian returns to wealth. We analyze two special cases: where spending is a power function of last period's wealth and the endowment uses 'payout smoothing'. Via nonlinear least squares, we estimate the optimal spending rate and the elasticity of intertemporal substitution for a trust with a typical diversified portfolio and for a portfolio of hedge funds. Finally, we use maximum entropy methods to characterize the returns distribution of a trust whose spending plan conforms with the optimality condition.

Suggested Citation

  • Stephen Satchell & Susan Thorp & Oliver Williams, 2012. "Estimating Consumption Plans for Recursive Utility by Maximum Entropy Methods," Research Paper Series 300, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:300
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    File URL: https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp300.pdf
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    References listed on IDEAS

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    Cited by:

    1. Cejnek, Georg & Franz, Richard & Stoughton, Neal M., 2023. "Portfolio Choice with Endogenous Donations - Modeling University Endowments," Journal of Economics and Business, Elsevier, vol. 125.

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    More about this item

    Keywords

    Intertemporal choice; Elasticity of intertemporal substitution; Moving average;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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