Dynamic Asset Allocation and Consumption with the Indirect Utility Function

Articles about asset allocation rely on the direct utility as a primitive to model the risk appetite of investors and to derive optimal asset allocation and consumption. However, and contrary to the indirect utility function, the direct utility function does not describe the risk aversion of agents at optimum. To correct his flaw, we propose a dynamic asset allocation setting where the input is the indirect utility function. In this economically sound framework, optimal consumption and asset allocation obtain in closed-form in general