Optimal Decision-Making with Time Diversification

One of the most enduring topics in financial theory is thepersistence of investment risk across time. Traditional financelacks methods for considering and hedging non-diversifiablerisks. This paper is based on the general equilibrium model ofAllen and Gale (1997). We extend their model in variousdirections: the intermediary is a firm and not a planner,financial markets are assumed to be incomplete, and the mechanismof intergenerational risk-sharing is endogenously determined. Ourmodel allows for the analysis of optimal behavior of individualsand the intermediary together with the respective feedbackprocesses.