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An Irrelevance Theorem for Risk Aversion and Time-Varying Risk

Author

Listed:
  • Andrew Y. Chen

    (Federal Reserve Board)

  • Francisco Palomino

    (Federal Reserve Board)

Abstract

We provide a theorem on the role of risk and risk attitudes in macroeconomic models that clarifies and extends the Tallarini (2000) separation result. Under (1) separation of intertemporal and risk preferences, (2) separation of drivers of first and higher moments in the model primitives, and (3) approximate linearity of constraints, risk aversion and time-varying risk are irrelevant for the elasticity of any endogenous variable with respect to state variables that don’t drive variation in higher moments. We discuss how models generate a more prominent role for risk by “breaking†or “adapting†to the assumptions in the theorem. (Copyright: Elsevier)

Suggested Citation

  • Andrew Y. Chen & Francisco Palomino, 2026. "An Irrelevance Theorem for Risk Aversion and Time-Varying Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 61, August.
    • Handle: RePEc:red:issued:24-132
    DOI: 10.1016/j.red.2026.101347
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    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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