We analyze and compare analytically continuous-time financial equilibria where heterogeneous risk averse investors care about model misspecification through some preference for robustness and in the presence of a stochastic opportunity set. This incorporates a concern for model misspecification into equilibrium asset prices. Since no exact equilibrium computations are possible in this model...
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In: Computational methods in decision-making, economics and finance, 2002, p. 109
Only a few intertemporal optimal consumption and portfolio problems in partial and general equilibrium can be solved explicitly. It is illustrated in the paper that perturbation theory is a powerful tool for deriving approximate analytical solutions for the desired optimal policies in problems where general state dynamics are admitted and a preference for robustness is present. Starting from the...
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