Dynamic choice with constant source-dependent relative risk aversion

Costis Skiadas*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

An axiomatic characterization of recursive utility with source-dependent constant relative risk aversion (CRRA), constant elasticity of intertemporal substitution, constant rate of impatience and subjective beliefs is established. The utility form is a minimal extension of Epstein–Zin–Weil utility that allows the CRRA to depend on the source of risk, a dependence that admits an ambiguity aversion interpretation. Dual representations of the proposed recursive utility are discussed and shown to be useful in tackling the central planner problem and associated asset pricing applications. An appendix presents the continuous-time version of the utility form, which preserves the effect of ambiguity aversion under Brownian/Poisson uncertainty, despite its smoothness.

Original languageEnglish (US)
Pages (from-to)393-422
Number of pages30
JournalEconomic Theory
Volume60
Issue number3
DOIs
StatePublished - Nov 1 2015

Keywords

  • Ambiguity aversion
  • Epstein–Zin–Weil utility
  • Recursive utility
  • Small-risk approximations
  • Source-dependent risk aversion

ASJC Scopus subject areas

  • Economics and Econometrics

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