Precautionary Saving against Correlation under Risk and Ambiguity

Takao Asano (takaoasano@okayama-u.ac.jp) and Yusuke Osaki (osakiy@waseda.jp)
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Takao Asano: Okayama University
Yusuke Osaki: Waseda University

No 1071, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper considers precautionary saving against the correlation between two risky attributes (wealth and health) and investigates how the correlation affects optimal savings under multivariate preferences. The signs of higher-order cross derivatives play a key role in determining the direction of precautionary saving against such correlation. Mixed correlation averse (seeking) individuals increase (decrease) savings in response to increases in correlation. Furthermore, we introduce ambiguity to the correlation and investigate how ambiguity affects the amount of optimal savings. The analyses enable us to deepen our understanding of saving behavior under multivariate preferences in the presence of correlation.

Keywords: Mixed correlation aversion (seekingness); Multivariate preferences; Smooth ambiguity model; Stochastic dominance (search for similar items in EconPapers)
Pages: 29 pages
Date: 2022-01
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (1)

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