Dynamic choice with constant source-dependent relative risk aversion

Costis Skiadas ()

Economic Theory, 2015, vol. 60, issue 3, 393-422

Abstract: An axiomatic characterization of recursive utility with source-dependent constant relative risk aversion (CRRA), constant elasticity of intertemporal substitution, constant rate of impatience and subjective beliefs is established. The utility form is a minimal extension of Epstein–Zin–Weil utility that allows the CRRA to depend on the source of risk, a dependence that admits an ambiguity aversion interpretation. Dual representations of the proposed recursive utility are discussed and shown to be useful in tackling the central planner problem and associated asset pricing applications. An appendix presents the continuous-time version of the utility form, which preserves the effect of ambiguity aversion under Brownian/Poisson uncertainty, despite its smoothness. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Source-dependent risk aversion; Ambiguity aversion; Recursive utility; Epstein–Zin–Weil utility; Small-risk approximations; D81; D91; G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00199-015-0920-9

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