Scenario Analysis with Recursive Utility: Dynamic Consumption Plans for Charitable Endowments

Stephen Satchell and Susan Thorp
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Stephen Satchell: University of Cambridge

No 209, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We determine optimal consumption paths under a series of returns scenarios for charitable endowments with distinct tastes over investment risk and inter-temporal substitution. Charities typically prefer smooth consumption paths but are investment-risk tolerant. Using a recursive, Kreps-Porteus utility function, we model the optimal disbursement from an infinitely-lived charitable trust, then, allowing a general form for the returns density, we apply stochastic dominance relations to estimate income/substitution effects whereby a change in future returns influences the current consumption rate. The elasticity of intertemporal substitution rather than risk aversion is key: optimal consumption rises or falls as the elasticity diverges from one.

Keywords: recursive utility; stochastic dominance; inter-temporal choice (search for similar items in EconPapers)
JEL-codes: D81 D91 G00 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2007-12-01
New Economics Papers: this item is included in nep-dge and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: SCENARIO ANALYSIS WITH RECURSIVE UTILITY: DYNAMIC CONSUMPTION PLANS FOR CHARITABLE ENDOWMENTS (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:209

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