Work

Optimal Consumption and Investment Choice with Bounded Memory and Recursive Preferences in a Multi-Asset Setting

Year: 2026

Type: article

Abstract: This paper studies an optimal consumption-investment problem in a multi-asset financial market where risky assets returns incorporate returns history. Preferences are modelled using Epstein-Zin recursive utility, allowing a separation between risk aversion and intertemporal substitution. Using the well-known martingale optimality principle and forward-backward stochastic differential equations (FBSDEs), we obtain explicit closed-form solutions for the optimal strategy and value function. A sensitivity analysis illustrates the dependence of optimal policies and value function on key parameters, including risk aversion, elasticity of intertemporal substitution (EIS), memory horizon, learning intensity, and wealth-history parameters. The findings provide new insights into the interaction between behavioural features and dynamic portfolio choice in a multi-asset setting.

Source: Risks

DOI: 10.3390/risks14060140

Authors: Wilfried Kuissi-Kamdem, Marcel Ndengo

Institutions: University of Freiburg, University of Rwanda, African Institute for Mathematical Sciences Ghana

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $2,172

Funder: Albert-Ludwigs-Universität Freiburg