 Risk aversion heterogeneity and the investment–uncertainty relationshipJournal of Economics, 2019, vol. 127, issue 3, No 2, 223-264 Abstract: Abstract We develop a dynamic macroeconomic model encompassing heterogeneity in households’ attitudes towards risk, and we allow agents to share aggregate volatility by trading safe assets. In equilibrium, when volatility increases, low-risk-averse households, who hold a long position in risky assets, perceive a higher certainty-equivalent future return on capital. The perceived yield may also increase for high-risk-averse agents, who hold riskless assets. In response to a rise in certainty-equivalent expected returns, savings decrease due to a limited willingness to substitute consumption over time. This generates a negative response of aggregate investment to an increase in systematic volatility, showing that the aggregate behavior of an heterogeneous agents economy can be different from the behavior originating from an ‘average’ representative agent. The appearance of degenerate wealth distributions is avoided by allowing the risk aversion of each household to change stochastically over time. Keywords: Aggregate investment; Volatility; Risk aversion; Heterogeneity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:127:y:2019:i:3:d:10.1007_s00712-018-0639-8 DOI: 10.1007/s00712-018-0639-8 Access Statistics for this article Journal of Economics is currently edited by Giacomo Corneo More articles in Journal of Economics from Springer |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.