Recursive Preferences, Correlation Aversion, and the Temporal Resolution of Uncertainty

Lorenzo Stanca

Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: Models of recursive utility are of central importance in many economic applications. This paper investigates a new behavioral feature exhibited by these models: aversion to risks that exhibit persistence (positive autocorrelation) through time, referred to as correlation aversion. I introduce a formal notion of such a property and provide a characterization based on risk attitudes, and show that correlation averse preferences admit a specific variational representation. I discuss how these findings imply that attitudes toward correlation are a crucial behavioral aspect driving the applications of recursive utility in fields such as asset pricing, climate policy, and optimal fiscal policy.

Keywords: Intertemporal substitution; risk aversion; correlation aversion; recursive utility; preference for early resolution of uncertainty; information. (search for similar items in EconPapers)
Pages: 48 pages
Date: 2023, Revised 2025
New Economics Papers: this item is included in nep-mic, nep-rmg and nep-upt
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:693

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