Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis

Epstein, Larry G.; Zin, Stanley E.

doi:10.1086/261750

Cited by 1,489 publications

(870 citation statements)

References 38 publications

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“…In the two period setting, the intertemporally additive reformulation of Epstein & Zin's (1989, 1991 infinite horizon recursive utility model is 16…”

Section: Intertemporal Risk Aversionmentioning

confidence: 99%

“…To obtain the normalization used by Epstein & Zin (1989, 1991, multiply equation (⋆) by (1 − β)(1 − η) and take both sides to the power of…”

Section: Intertemporal Risk Aversionmentioning

confidence: 99%

“…Thus, the quantitative illustration in the case of risk translates immediately into an illustration of the quantitative effects under ambiguity aversion. Estimates of the generalized isoelastic model usually build on Epstein & Zin (1991) and Campbell's (1996) log-linearizing the Euler equations. The estimation of the isoelastic model is significantly more challenging than in the case of the standard model.…”

Section: Quantification Of Parametersmentioning

confidence: 99%

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Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity

Traeger

2014

Econ Theory

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Uncertainty has an almost negligible impact on project value in the standard economic model. I show that a comprehensive evaluation of uncertainty and uncertainty attitude changes this picture fundamentally. The illustration of this result relies on the discount rate, which is the crucial determinant in balancing immediate costs against future benefits, and the single most important determinant of optimal mitigation policies in the integrated assessment of climate change. First, the paper removes an implicit assumption of (intertemporal or intrinsic) risk neutrality from the standard economic model. Second, the paper introduces aversion to non-risk uncertainty (ambiguity). I show a close formal similarity between the model of intertemporal risk aversion, which is a reformulation of the widespread Epstein-Zin-Weil model, and a recent model of smooth ambiguity aversion. I merge the models, achieving a threefold disentanglement between, risk aversion, ambiguity aversion, and the propensity to smooth consumption over time.JEL Codes: D61, D81, D90, H43, Q00, Q54

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“…In the two period setting, the intertemporally additive reformulation of Epstein & Zin's (1989, 1991 infinite horizon recursive utility model is 16…”

Section: Intertemporal Risk Aversionmentioning

confidence: 99%

“…To obtain the normalization used by Epstein & Zin (1989, 1991, multiply equation (⋆) by (1 − β)(1 − η) and take both sides to the power of…”

Section: Intertemporal Risk Aversionmentioning

confidence: 99%

Section: Quantification Of Parametersmentioning

confidence: 99%

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Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity

Traeger

2014

Econ Theory

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“…[12] argued that Hall's model was mis-specified and found estimates of resistance to substitution ρ that vary between 2.2 and 3.1. Epstein and Zin's seminal paper [3] found estimates for ρ that vary between 1.2 and 5 and estimates for γ that vary between 0.8 and 1.3. Using a similar approach, [11] estimates for ρ and γ are in the range of 1.5.…”

Section: Climate-economy With Recursive Preferencesmentioning

confidence: 98%

“…These preferences were introduced by [9]. To date, recursive preferences have been used mostly in finance and precautionary savings literature ( [13], [3]). …”

Section: Introductionmentioning

confidence: 99%

Risk Aversion, Intergenerational Equity and Climate Change

Ha-Duong

Treich²

2004

Environmental and Resource Economics

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The paper investigates a climate-economy model with an iso-elastic welfare function in which one parameter γ measures relative risk-aversion and a distinct parameter ρ measures resistance to intertemporal substitution. We show both theoretically and numerically that climate policy responds differently to variations in the two parameters. In particular, we show that higher γ but lower ρ leads to increase emissions control. We also argue that climate-economy models based on intertemporal expected utility maximization, i.e. models where γ = ρ, may misinterpret the sensitivity of the climate policy to risk-aversion.

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Risk Attitude

Munier¹,

Tapiero²

2008

Encyclopedia of Quantitative Risk Analysis and Assessment

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The concepts and analytical expressions of absolute and relative risk aversion, in both weak and strong senses, are explained and discussed. Examples are computed. The extension to multivariate risk aversion, the problem of background risk, and the relationship between mean‐variance and expected utility (EU) models are dealt with in an EU framework. Finally, new developments in relation to the question of generalized risk aversion in a non‐EU framework and to the measurement of risk aversion concepts in financial analysis are discussed.

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Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis

Cited by 1,489 publications

References 38 publications

Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity

Why uncertainty matters: discounting under intertemporal risk aversion and ambiguity

Risk Aversion, Intergenerational Equity and Climate Change

Risk Attitude

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