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Optimal Decision-Making with Time Diversification

Author

Listed:
  • Paolo Vanini
  • Luigi Vignola

Abstract

One of the most enduring topics in financial theory is the persistence of investment risk across time. Traditional finance lacks methods for considering and hedging non-diversifiable risks. This paper is based on the general equilibrium model of Allen and Gale (1997). We extend their model in various directions: the intermediary is a firm and not a planner, financial markets are assumed to be incomplete, and the mechanism of intergenerational risk-sharing is endogenously determined. Our model allows for the analysis of optimal behavior of individuals and the intermediary together with the respective feedback processes. JEL classification codes: G10, G20, D91

Suggested Citation

  • Paolo Vanini & Luigi Vignola, 2002. "Optimal Decision-Making with Time Diversification," Review of Finance, European Finance Association, vol. 6(1), pages 1-30.
    • Handle: RePEc:oup:revfin:v:6:y:2002:i:1:p:1-30.
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    File URL: http://hdl.handle.net/10.1023/A:1015063315409
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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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