Scandinavian Working Papers in Economics
Working Papers,
Lund University, Department of Economics
No 2005:17: Expected Life-Time Utility and Hedging Demands in a Partially Observable Economy
Frederik Lundtofte ()
Additional contact information
Frederik Lundtofte: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Abstract: This paper analyzes the expected life-time utility and the hedging demands in a Lucas (1978) economy, in which the dividend drift term is unknown and mean-reverting. An expression for the individual investor’s expected life-time utility in equilibrium is derived, and his hedging demand is analyzed. The hedging demand consists of two components, which could work in opposite directions so that a conservative investor may end up having a positive hedging demand. Interestingly, this differs from the theoretical findings in Brennan (1998), who analyzes the portfolio choice problem of an agent who learns about a constant expected stock return.
Keywords: learning; incomplete information; equilibrium; hedging demands
29 pages, February 24, 2005
- Published as
- Frederik Lundtofte, (2008), 'Expected Life-Time Utility and Hedging Demands in a Partially Observable Economy', European Economic Review, vol 52, pages 1072-1096
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