Distributional Risk, Stochastic Volatility and Precautionary Savings

Richard M. H. Suen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyses the optimal saving behaviour of a risk-averse and prudent consumer who faces two sources of income risk: risk as described by a given probability distribution and risk in the distribution itself. The latter is captured by the randomness in the parameters underlying the probability distribution and is referred to as distributional risk. Stochastic volatility, which generally refers to the randomness in the variance, can be viewed as a form of distributional risk. Necessary and sufficient conditions by which an increase in distributional risk will induce the consumer to save more are derived under two specifications of preferences: expected utility preferences and Selden/Kreps-Porteus preferences. The connection (or lack of) between these conditions and stochastic volatility is addressed. The additional conditions under which a prudent consumer will save more under greater volatility risk are identified.

Keywords: Stochastic volatility; stochastic convexity; precautionary saving. (search for similar items in EconPapers)
JEL-codes: D81 D91 E21 (search for similar items in EconPapers)
Date: 2016-07-19
New Economics Papers: this item is included in nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/72732/1/MPRA_paper_72732.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:72732

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().