Intertemporal Cost-efficient Consumption

ArXiv ID: 2405.16336 “View on arXiv”

Authors: Unknown

Abstract

We aim to provide an intertemporal, cost-efficient consumption model that extends the consumption optimization inspired by the Distribution Builder, a tool developed by Sharpe, Johnson, and Goldstein. The Distribution Builder enables the recovery of investors’ risk preferences by allowing them to select a desired distribution of terminal wealth within their budget constraints. This approach differs from the classical portfolio optimization, which considers the agent’s risk aversion modeled by utility functions that are challenging to measure in practice. Our intertemporal model captures the dependent structure between consumption periods using copulas. This strategy is demonstrated using both the Black-Scholes and CEV models.

Keywords: Intertemporal Consumption, Copulas, Distribution Builder, Risk Preferences, Portfolio Optimization, Wealth Management / Personal Finance

Complexity vs Empirical Score

• Math Complexity: 8.5/10
• Empirical Rigor: 2.0/10
• Quadrant: Lab Rats
• Why: The paper is mathematically dense, featuring advanced stochastic calculus (Girsanov theorem, Malliavin derivatives), copula theory, and proofs of existence. However, it lacks any real-world data, backtests, or implementation code, relying purely on theoretical models like Black-Scholes and CEV.

  flowchart TD
    A["Research Goal<br>Intertemporal Cost-efficient<br>Consumption Model"] --> B["Key Methodology<br>Distribution Builder & Copulas"]
    B --> C["Data/Inputs<br>Wealth Constraints &<br>Consumption Preferences"]
    C --> D["Computational Process<br>Model Interdependencies<br>via Copula Structure"]
    D --> E["Application<br>Black-Scholes &<br>CEV Models"]
    E --> F["Key Findings<br>Risk Preferences Recovered<br>Optimal Consumption Defined"]