Expected life-time utility and hedging demands in a partially observable economy

Frederik Lundtofte*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

10 Citations (Scopus)


This paper analyzes the expected life-time utility and the hedging demands in an exchange only, representative agent general equilibrium under incomplete information. We derive an expression for the investor's expected life-time utility, and analyze his hedging demands for intertemporal changes in the stochastic unobservable growth of the endowment process and the changing quality of information regarding these changes. The hedging demands consist of two components, which could work in opposite directions so that a conservative consumer may end up having positive hedging demands. Our results are qualitatively different from those prevailing under constant growth (cf. [Brennan, M.J., 1998. The role of learning in dynamic portfolio decisions. European Finance Review, 1, 295-306; Ziegler, A., 2003. Incomplete Information and Heterogeneous Beliefs in Continuous-Time Finance. Springer, Berlin, Chapter 2].

Original languageEnglish
JournalEuropean Economic Review
Issue number6
Pages (from-to)1072-1096
Number of pages25
Publication statusPublished - 1 Aug 2008
Externally publishedYes


  • Equilibrium
  • Hedging demands
  • Incomplete information
  • Learning


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