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Optimal risk sharing with translation invariant recursive utility in continuous time

Author

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  • Aase, Knut K.

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

Abstract

We consider optimal risk sharing where agents have preferences represented by translation invariant recursive utility. The dynamics in continuous time is driven by diffusion processes. The model has some appealing features compared to the scale invariant version. First, the model allows for heterogenous agents, where optimal risk sharing can be addressed. Second, a new endogenous variable allows for a variety of results, not possible in the standard model. The model allows for a new look at the mutuality principle. We also endow the model with a stock market and derive a consumption based capital asset pricing model.

Suggested Citation

  • Aase, Knut K., 2025. "Optimal risk sharing with translation invariant recursive utility in continuous time," Discussion Papers 2025/16, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2025_016
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    File URL: https://hdl.handle.net/11250/3192798
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    More about this item

    Keywords

    Optimal risk sharing; the mutuality principle; recursive utility; CCAPM; the stochastic maximum principle;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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