TY - JOUR

T1 - Smooth ambiguity aversion toward small risks and continuous-time recursive utility

AU - Skiadas, Costis

PY - 2013/8

Y1 - 2013/8

N2 - Assuming Brownian/Poisson uncertainty, a certainty equivalent {eth}CE{Thorn} based on the smooth second-order expected utility of Klibanoff, Marinacci, and Mukerji is shown to be approximately equal to an expectedutility CE. As a consequence, the corresponding continuous-time recursive utility form is the same as for Kreps-Porteus utility. The analogous conclusions are drawn for a smooth divergence CE, based on a formulation of Maccheroni,Marinacci, and Rustichini, but only under Brownian uncertainty. Under Poisson uncertainty, a smooth divergence CE can be approximated with an expected-utility CE if and only if it is of the entropic type. A nonentropic divergence CE results in a new class of continuous-time recursive utilities that price Brownian and Poissonian risks differently.

AB - Assuming Brownian/Poisson uncertainty, a certainty equivalent {eth}CE{Thorn} based on the smooth second-order expected utility of Klibanoff, Marinacci, and Mukerji is shown to be approximately equal to an expectedutility CE. As a consequence, the corresponding continuous-time recursive utility form is the same as for Kreps-Porteus utility. The analogous conclusions are drawn for a smooth divergence CE, based on a formulation of Maccheroni,Marinacci, and Rustichini, but only under Brownian uncertainty. Under Poisson uncertainty, a smooth divergence CE can be approximated with an expected-utility CE if and only if it is of the entropic type. A nonentropic divergence CE results in a new class of continuous-time recursive utilities that price Brownian and Poissonian risks differently.

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U2 - 10.1086/671179

DO - 10.1086/671179

M3 - Article

AN - SCOPUS:84884240809

SN - 0022-3808

VL - 121

SP - 775

EP - 792

JO - Journal of Political Economy

JF - Journal of Political Economy

IS - 4

ER -