Optimal risk sharing with translation invariant recursive utility in continuous time

Knut Aase

No 2025/16, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: We consider optimal risk sharing where agents have preferences represented by translation invariant recursive utility. The dynamics in continuous time is driven by diffusion processes. The model has some appealing features compared to the scale invariant version. First, the model allows for heterogenous agents, where optimal risk sharing can be addressed. Second, a new endogenous variable allows for a variety of results, not possible in the standard model. The model allows for a new look at the mutuality principle. We also endow the model with a stock market and derive a consumption based capital asset pricing model.

Keywords: Optimal risk sharing; the mutuality principle; recursive utility; CCAPM; the stochastic maximum principle (search for similar items in EconPapers)
JEL-codes: D51 D53 D90 E21 G10 G12 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2025-05-12
New Economics Papers: this item is included in nep-upt
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