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| Author: | Schroder, M. Skiadas, C. |
| Title: | An Isomorphism Between Asset Pricing Models With and Without Linear Habit Formation |
| Journal: | Review of Financial Studies
2002 : FALL, VOL. 15:4, p. 1189-1222 |
| Index terms: | MODELS PRICES ASSETS ANALYTICAL REVIEW |
| Language: | eng |
| Abstract: | The authors show an isomorphism between optimal portfolio selection or competitive equilibrium models with utilities incorporating linear habit formation, and corresponding models without habit formation. The isomorphism can be used to mechanically transform known solutions not involving habit formation to corresponding solutions with habit formation. For example, the Constantinides (1990) and Ingersoll (1992) solutions are mechanically obtained from the familiar Merton solutions for the additive utility case, without recourse to a Bellman equation or first-order conditions. Recent solutions to portfolio selection problems with recursive utility and a stochastic investment opportunity set are readily transformed to novel solutions of corresponding problems. |
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