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.
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|Date of revision:||2011|
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- Riccardo Colacito & Mariano M. Croce, 2011.
"Risks for the Long Run and the Real Exchange Rate,"
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- Taeyoung Doh, 2008.
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2008 Meeting Papers
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- 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," Research Working Paper RWP 08-11, Federal Reserve Bank of Kansas City.
- Jesper Rangvid & Maik Schmeling & Andreas Schrimpf, 2009. "Global Asset Pricing: Is There a Role for Long-run Consumption Risk?," CREATES Research Papers 2009-57, School of Economics and Management, University of Aarhus.
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