Classical backward preferences of an investor are simply defined by a family of her value functions across states and times. Due to the backward nature, a terminal preference must be specified a priori. However, pre-specifying the future preference is actually unjustifiable in practice. To rectify this modeling drawback, a novel concept called forward preferences has been introduced in Musiela and Zariphopoulou (2008).
In this project, we study both the classical backward preferences and the recently developed forward preferences. As the first stage of this project, we aim to investigate and compare the two preferences via the closed-form representations of the preferences under the binomial market model.
Students: Gongyi Chen, Bhanu Segal
Supervisor: Alfred Chong