Rational Ignorance In Long-Run Risk Models
We document an unpleasant feature of Epstein-Zin preferences in a stylized model economy of the long-run risk type now widespread in Asset Pricing: Agents with preference parameters commonly described as indicating a "preference for early resolution of uncertainty" achieve higher utility levels if they can commit to ignoring information on the state of the business cycle. For parameter choices similar to those used to explain asset prices, an agent can achieve utility gains equivalent to a more than 40 % increase in life-time consumption by committing to ignore information on the trend growth rate of the endowment good. We show that opting for such a coarser information set can be implemented and supported as an equilibrium strategy.
|Date of creation:||2011|
|Date of revision:||2011|
|Contact details of provider:|| Postal: Via Ostiense, 161, 00154 ROMA|
Web page: http://host.uniroma3.it/centri/crei/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Taeyoung Doh, 2008.
"Long run risks in the term structure of interest rates: estimation,"
Research Working Paper
RWP 08-11, Federal Reserve Bank of Kansas City.
- Taeyoung Doh, 2013. "Long‐Run Risks In The Term Structure Of Interest Rates: Estimation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(3), pages 478-497, 04.
- Taeyoung Doh, 2008. "Long Run Risks in the Term Structure of Interest Rates : Estimation," 2008 Meeting Papers 137, Society for Economic Dynamics.
- Riccardo Colacito & Mariano Croce, 2005.
"Risks For The Long Run And The Real Exchange Rate,"
2005 Meeting Papers
794, Society for Economic Dynamics.
- Jesper Rangvid & Maik Schmeling & Andreas Schrimpf, 2009. "Global Asset Pricing: Is There a Role for Long-run Consumption Risk?," CREATES Research Papers 2009-57, Department of Economics and Business Economics, Aarhus University.
- Thomas Tallarini, .
"Risk-Sensitive Real Business Cycles,"
GSIA Working Papers
1997-35, Carnegie Mellon University, Tepper School of Business.
When requesting a correction, please mention this item's handle: RePEc:rcr:wpaper:08_11. 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: (Francesca Vaino)
If references are entirely missing, you can add them using this form.