Intertemporal Cost-efficient Consumption

TL;DR

This paper introduces an intertemporal, cost-efficient consumption model that captures dependencies across periods using copulas, extending traditional utility-based approaches and demonstrated with Black-Scholes and CEV models.

Contribution

It develops a novel intertemporal consumption framework based on the Distribution Builder concept, moving beyond utility functions to directly model risk preferences.

Findings

Model effectively captures dependencies between consumption periods.

Demonstrated applicability with Black-Scholes and CEV models.

Provides a practical alternative to classical utility-based optimization.

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.