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Recursive utility and jump-diffusions

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  • Aase, Knut K.

    ()
    (Dept. of Business and Management Science, Norwegian School of Economics)

Abstract

We derive the equilibrium interest rate and risk premiums using recursive utility for jump-diffusions. Compared to to the continuous version, including jumps allows for a separate risk aversion related to jump size risk in addition to risk aversion related to the continuous part. We also consider a version that allows marginal utility to depend on past consumption. The models with jumps are shown to have a potential to give better explanation of empirical regularities than the recursive models based on merely continuous dynamics.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2014/9.

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Length: 41 pages
Date of creation: 25 Mar 2014
Date of revision:
Handle: RePEc:hhs:nhhfms:2014_009

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Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Related research

Keywords: Recursive utility; jump dynamics; the stochastic maximum principle; early resolution; utility gradients;

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References

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