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Heterogeneous Risk Attitudes in a Continuous-Time Model

  • Chiaki Hara

    ()

    (Institute of Economic Research, Kyoto University)

We prove that every continuous-time model in which all consumers have time-homogeneous and time-additive utility functions and share a common probabilistic belief and a common discount rate can be reduced to a static model. This result allows us to extend some of the existing results on the representative consumer and risk-sharing rules in static models to continuous-time models. We show that the equilibrium interest rate is lower and more volatile than in the standard representative consumer economy, and that the individual consumption growth rates are more dispersed than is predicted from the first-order conditions.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP609.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 609.

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Length: 31pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:kyo:wpaper:609
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  1. Kohara, Miki & Ohtake, Fumio & Saito, Makoto, 2001. "A Test of the Full Insurance Hypothesis: The Case of Japan," Discussion Papers 2001-05, Graduate School of Economics, Hitotsubashi University.
  2. Masao Ogaki & Qiang Zhang, 2000. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometric Society World Congress 2000 Contributed Papers 1588, Econometric Society.
  3. Gollier, Christian, 2001. "Wealth Inequality and Asset Pricing," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 181-203, January.
  4. Larry G. Epstein & JianJun Miao, 2001. "A Two-Person Dynamic Equilibrium under Ambiguity," RCER Working Papers 478, University of Rochester - Center for Economic Research (RCER).
  5. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
  6. Christian Gollier & Richard Zeckhauser, 2005. "Aggregation of Heterogeneous Time Preferences," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 878-896, August.
  7. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
  8. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  9. Dumas, Bernard, 1989. "Two-Person Dynamic Equilibrium in the Capital Market," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 157-88.
  10. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
  11. repec:cup:cbooks:9780521586054 is not listed on IDEAS
  12. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  13. Hara, Chiaki & Huang, James & Kuzmics, Christoph, 2007. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," Discussion Paper 323, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  14. Karl Schmedders, 2005. "Two-Fund Separation in Dynamic General Equilibrium," Discussion Papers 1398, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Chiaki Hara & James Huang & Christoph Kuzmics, 2006. "Efficient Risk-Sharing Rules with Heterogeneous Risk Attitudes and Background Risks," KIER Working Papers 621, Kyoto University, Institute of Economic Research.
  16. Laurent Calvet & Jean-Michel Grandmont & Isabelle Lemaire, 2001. "Aggregation of Heterogenous Beliefs and Asset Pricing in Complete Financial Markets," Working Papers 2001-01, Centre de Recherche en Economie et Statistique.
  17. Philippe Weil, 1992. "Equilibrium Asset Prices With Undiversifiable Labor Income Risk," NBER Working Papers 3975, National Bureau of Economic Research, Inc.
  18. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  19. Jiang, Wang, 1996. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Journal of Financial Economics, Elsevier, vol. 41(1), pages 75-110, May.
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