A Robust Approach to Risk Aversion
AbstractWe investigate whether the set of Kreps and Porteus (1978) preferences include classes of preferences that are stationary, monotonic and well-ordered in terms of risk aversion. We prove that the class of preferences introduced by Hansen and Sargent (1995) in their robustness analysis is the only one that fulfills these properties. The paper therefore suggests a shift from the traditional approach to studying the role of risk aversion in recursive problems. We also provide applications, in which we discuss the impact of risk aversion on asset pricing and risk sharing.
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Bibliographic InfoPaper provided by ETH Zurich, Chair of Systems Design in its series Working Papers with number ETH-RC-13-002.
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risk aversion; recursive utility; robustness; ordinal dominance; risk free rate; equity premium; risk sharing. JEL codes: E2; E43; E44.;
Other versions of this item:
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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