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Intertemporal substitution and recursive smooth ambiguity preferences

Author

Listed:
  • Jianjun Miao

    (Department of Economics, Boston University, CEMA, Central University of Finance and Economics, and AFR, Zhejiang University)

  • Takashi Hayashi

    (Department of Economics, University of Texas at Austin)

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 et al. (2005) and the twostage 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

  • Jianjun Miao & Takashi Hayashi, 2010. "Intertemporal substitution and recursive smooth ambiguity preferences," Boston University - Department of Economics - Working Papers Series WP2010-030, Boston University - Department of Economics.
    • Handle: RePEc:bos:wpaper:wp2010-030
    as

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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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