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Intertemporal substitution and recursive smooth ambiguity preferences

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  • ,

    (Department of Economics, University of Texas at Austin)

  • ,

    (Department of Economics, Boston University)

Abstract

In this paper, we establish an axiomatically founded generalized recursive smooth ambiguity model that allows for a separation among intertemporal substitution, risk aversion, and ambiguity aversion. We axiomatize this model using two approaches: the second-order act approach à la Klibanoff, Marinacci, and Mukerji (2005) and the two-stage randomization approach à la Seo (2009). We characterize risk attitude and ambiguity attitude within these two approaches. We then discuss our model's application in asset pricing. Our recursive preference model nests some popular models in the literature as special cases.

Suggested Citation

  • , & ,, 2011. "Intertemporal substitution and recursive smooth ambiguity preferences," Theoretical Economics, Econometric Society, vol. 6(3), September.
    • Handle: RePEc:the:publsh:843
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    References listed on IDEAS

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    1. Segal, Uzi, 1987. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 175-202, February.
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    More about this item

    Keywords

    Ambiguity; ambiguity aversion; risk aversion; intertemporal substitution; model uncertainty; recursive utility; dynamic consistency;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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