IDEAS home Printed from https://ideas.repec.org/p/eth/wpswif/13-172.html
   My bibliography  Save this paper

A Robust Approach to Risk Aversion

Author

Listed:

Abstract

We 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.

Suggested Citation

  • Antoine Bommier & François Le Grand, 2013. "A Robust Approach to Risk Aversion," CER-ETH Economics working paper series 13/172, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  • Handle: RePEc:eth:wpswif:13-172
    as

    Download full text from publisher

    File URL: http://www.cer.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-13-172.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chateauneuf, Alain & Cohen, Michele & Meilijson, Isaac, 2004. "Four notions of mean-preserving increase in risk, risk attitudes and applications to the rank-dependent expected utility model," Journal of Mathematical Economics, Elsevier, pages 547-571.
    2. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, pages 507-532.
    3. Chew, Soo Hong & Epstein, Larry G., 1990. "Nonexpected utility preferences in a temporal framework with an application to consumption-savings behaviour," Journal of Economic Theory, Elsevier, vol. 50(1), pages 54-81, February.
    4. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
    5. Keeney,Ralph L. & Raiffa,Howard, 1993. "Decisions with Multiple Objectives," Cambridge Books, Cambridge University Press, number 9780521438834, December.
    6. Klibanoff, Peter & Marinacci, Massimo & Mukerji, Sujoy, 2009. "Recursive smooth ambiguity preferences," Journal of Economic Theory, Elsevier, vol. 144(3), pages 930-976, May.
    7. Kristof Bosmans, 2007. "Comparing degrees of inequality aversion," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 29(3), pages 405-428, October.
    8. Kihlstrom, Richard E. & Mirman, Leonard J., 1974. "Risk aversion with many commodities," Journal of Economic Theory, Elsevier, vol. 8(3), pages 361-388, July.
    9. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July.
    10. Ana Cecília Fieler, 2011. "Nonhomotheticity and Bilateral Trade: Evidence and a Quantitative Explanation," Econometrica, Econometric Society, vol. 79(4), pages 1069-1101, July.
    11. Bommier, Antoine & Chassagnon, Arnold & Le Grand, François, 2012. "Comparative risk aversion: A formal approach with applications to saving behavior," Journal of Economic Theory, Elsevier, vol. 147(4), pages 1614-1641.
    12. Grant, Simon & Quiggin, John, 2005. "Increasing uncertainty: a definition," Mathematical Social Sciences, Elsevier, pages 117-141.
    13. Epstein, Larry G., 1983. "Stationary cardinal utility and optimal growth under uncertainty," Journal of Economic Theory, Elsevier, vol. 31(1), pages 133-152, October.
    14. Yaari, Menahem E., 1969. "Some remarks on measures of risk aversion and on their uses," Journal of Economic Theory, Elsevier, vol. 1(3), pages 315-329, October.
    15. Jessica A. Wachter & Motohiro Yogo, 2010. "Why Do Household Portfolio Shares Rise in Wealth?," Review of Financial Studies, Society for Financial Studies, pages 3929-3965.
    16. Jessica A. Wachter & Motohiro Yogo, 2010. "Why Do Household Portfolio Shares Rise in Wealth?," Review of Financial Studies, Society for Financial Studies, pages 3929-3965.
    17. Thomas D. Tallarini, Jr. & Harold H. Zhang, 2005. "External Habit and the Cyclicality of Expected Stock Returns," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1023-1048, May.
    18. repec:dau:papers:123456789/4434 is not listed on IDEAS
    19. repec:hal:journl:halshs-00212281 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bommier, Antoine & Lanz, Bruno & Zuber, Stéphane, 2015. "Models-as-usual for unusual risks? On the value of catastrophic climate change," Journal of Environmental Economics and Management, Elsevier, pages 1-22.
    2. Antoine Bommier & Bruno Lanz & Stéphane Zuber, 2014. "Fair management of social risk," Documents de travail du Centre d'Economie de la Sorbonne 14017, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Fleurbaey, Marc & Zuber, Stéphane, 2015. "Discounting, beyond utilitarianism," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 9, pages 1-52.
    4. repec:hal:journl:halshs-00973491 is not listed on IDEAS

    More about this item

    Keywords

    risk aversion; recursive utility; robustness; ordinal dominance; risk free rate; equity premium; risk sharing;

    JEL classification:

    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eth:wpswif:13-172. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/iwethch.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.