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Risk aversion heterogeneity and the investment-uncertainty relationship

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  • Gianluca Femminis

    ()
    (DISCE,Università Cattolica)

Abstract

A simple dynamic general equilibrium model of savings and investment is populated by agents with Kreps-Porteus preferences. Households are heterogeneous in their risk aversion, which explains the negative relationship between aggregate investment and aggregate uncertainty. Agents trade a riskless assets to share the aggregate risk, so that in equilibrium a higher uncertainty induces the low risk-averse individuals to increase their position in the risky asset, and the highly risk averse agents to increase their share of safe bonds. This portfolio effect increases the certainty-equivalent future returns; in response to this rise, savings and investment decrease due to a limited willingness to substitute consumption over time.

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File URL: http://istituti.unicatt.it/teoria_economica_metodi_quantitativi_itemq1260.pdf
File Function: First version, 2012
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Paper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Teoria Economica e Metodi Quantitativi with number itemq1260.

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Length: 49 pages
Date of creation: Jan 2012
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Handle: RePEc:ctc:serie6:itemq1260

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Web page: http://www.unicatt.it/Istituti/TeoriaEconomica
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Keywords: Aggregate investment; uncertainty; risk aversion; heterogeneity.;

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