Asset pricing with stochastic differential utility

Asset pricing theory is presented with representative-agentutility given by a stochastic differential formulation of recursiveutility. Asset returns are characterized from general first-orderconditions of the Hamilton-Bellman-Jacobi equation for optimalcontrol. Homothetic representative agent recursive utility functionsare shown to imply that excess expected rates of return on securitiesare given by a linear combination of the continuous-time market-portfolio-basedcapital asset pricing model (CAPM) and the consumption-basedCAPM. The Cox, Ingersoll and Ross characterization of the termstructure is examined with a recursive generalization, showingthe response of the term structure to variations in risk aversion.Also, a new multicommodity factor-return model, as well as anextension of the 'usual' discounted expected value formula forasset prices, is introduced.