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Intertemporal substitution and recursive smooth ambiguity preferences. (English) Zbl 1278.91043

Summary: 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 P. Klibanoff et al. [Econometrica 73, No. 6, 1849–1892 (2005; Zbl 1151.91372)] and the two-stage randomization approach à la K. Seo [Econometrica 77, No. 5, 1575–1605 (2009; Zbl 1178.91053)]. 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.

MSC:

91B08 Individual preferences
91B16 Utility theory
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