Time consistency, temporal resolution indifference and the separation of time and risk

Felix Kubler (), Larry Selden () and Xiao Wei ()
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Felix Kubler: Department of Finance, University of Zurich
Larry Selden: Graduate School of Business, Columbia University & University of Pennsylvania
Xiao Wei: School of Economics, Fudan University and Shanghai Institute of International Finance and Economics

Theoretical Economics, Forthcoming

Abstract: For general choice spaces, standard dynamic preference models cannot simultaneously satisfy the properties of time consistency, the separation of time and risk preferences and the ability to accommodate an indifference to the timing of when risk is resolved. In the context of a consumption portfolio choice problem often underlying asset pricing and macro models, we derive necessary and sufficient conditions such that all three properties are satisfied. We also show that quantitatively reasonable deviations from our sufficient conditions can result in surprisingly small deviations from time consistency holding.

Keywords: Time consistency; separation of time and risk; temporal 1 resolution indifference; consumption-portfolio problem (search for similar items in EconPapers)
JEL-codes: D11 D15 D80 (search for similar items in EconPapers)
Date: 2025-09-16
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