Mathematics and Financial Economics

, Volume 8, Issue 1, pp 71–108 | Cite as

Nonmyopic optimal portfolios in viable markets

  • Jakša Cvitanić
  • Semyon Malamud


We provide a representation for the nonmyopic optimal portfolio of an agent consuming only at the terminal horizon when the single state variable follows a general diffusion process and the market consists of one risky asset and a risk-free asset. The key term of our representation is a new object that we call the “rate of macroeconomic fluctuation” whose properties are fundamental for the portfolio dynamics. We show that, under natural cyclicality conditions, (i) the agent’s hedging demand is positive (negative) when the product of his prudence and risk tolerance is below (above) two and (ii) the portfolio weights decrease in risk aversion. We apply our results to study a general continuous-time capital asset pricing model and show that under the same cyclicality conditions, the market price of risk is countercyclical and the price of the risky asset exhibits excess volatility.


Heterogeneous agents Nonmyopic optimal portfolios  Hedging demand Equilibrium 

JEL Classification

D53 G11 G12 



The research of J. Cvitanić was supported in part by NSF grant DMS 10-08219. The research of S. Malamud was supported in part by NCCR FINRISK, Project D1. We thank Patrick Bolton, Jerome Detemple, Bernard Dumas, Campbell Harvey, Julien Hugonnier, Elyes Jouini, Loriano Mancini, Rajnish Mehra, and Erwan Morellec for helpful comments, as well as audiences at a number of seminars and conferences. Existing errors are our sole responsibility. A previous version of this paper was titled “Equilibrium Asset Pricing and Portfolio Choice with Heterogeneous Preferences”.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Division of Humanities and Social SciencesCaltechPasadenaUSA
  2. 2.Swiss Finance Institute, EPF LausanneLausanneSwitzerland

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