ISSN:
1554-9658
Keywords:
Multivariate Risk Aversion
;
Intertemporal Substitution
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract Researchers often assume that preferences over uncertain consumption streams are representable by $$E\left[ {\left( {{1 \mathord{\left/ {\vphantom {1 \gamma }} \right. \kern-\nulldelimiterspace} \gamma }} \right)\sum\limits_{t = 0}^x {\delta ^t \tilde c_t^\gamma } } \right]$$ , where $$\tilde c_t $$ , is (random) period t consumption. It is moreover often asserted that estimates of γ cannot be unambiguously interpreted, since the quantity 1 − γ measures both relative risk aversion and the reciprocal of the elasticity of substitution. Clearly, this ambiguity arises only if 1 − γ indeed measures risk aversion. Although changes in γ cannot reflect changes in risk aversion according to standard definitions of comparative multivariate risk aversion, we show that γ is rationalizable as a risk aversion measure provided that the “acceptance set” of sure prospects is restricted. We also show, however, that there is essentially no relationship between changes in γ and optimal consumption, even in a simple two period model; this finding casts doubt upon the interpretation of γ as a risk aversion measure.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF00962712
