Precautionary saving in mean-variance models and different sources of risk

Marcos Vergara and Claudio Bonilla

Economic Modelling, 2021, vol. 98, issue C, 280-289

Abstract: We study the effects of first- and second-order risk increases on precautionary saving in a mean-variance model. In doing so, we reduce the gap between the theory of saving, which mainly stems from the expected utility model, and empirical estimations of the theory that are based on different measures of dispersion; these are atheoretical concepts that do not arise from optimal agent behavior. We then analyze what effects different risk sources have on saving and show that our results, derived in the mean-variance space, can easily be translated to conditions in the expected utility space. We argue that our contribution establishes a more solid ground for analyzing policies in highly risky environments, such as the COVID-19 pandemic.

Keywords: Precautionary saving; μ,σ-preferences; Elasticity of risk aversion (search for similar items in EconPapers)
JEL-codes: D81 E21 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:98:y:2021:i:c:p:280-289

DOI: 10.1016/j.econmod.2020.11.017

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