The economics of risk sharing in discrete time with translation invariant recursive utility
This paper presents translation invariant recursive utility models for optimal risk sharing, asset pricing, and equilibrium in dynamic financial markets.
What it examines
The paper addresses optimal risk sharing in dynamic economies using translation invariant recursive utility. It examines pricing implications, marginal rates, and risk premiums with an explicit annuity representation. It develops aggregative market models compared to classical expected utility and considers heterogeneous preferences in a multi-agent setting.
What it concludes
The study finds recursive utility models with translation invariance offer flexible risk sharing, stock valuation, and risk premiums independent of wealth. Results suggest improved asset pricing, efficient pooling among diverse agents, and policy insights for debt and insurance markets. Future work may refine data estimation and explore broader macroeconomic applications.
Evidence objects
The study introduces translation invariant recursive utility, decoupling risk aversion from intertemporal substitution, thereby enabling analysis of heterogeneous agent preferences and enhancing dynamic risk sharing beyond traditional expected utility frameworks.
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A surprising innovation replaces non-traded wealth with an endogenous traded annuity in the state-price formula, elucidating side-payments among agents and shedding new light on consumption dynamics and equity premium puzzles.
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Utilizing rigorous mathematical derivations, Taylor series approximations, and joint normal assumptions, the paper derives closed-form expressions for risk premiums and short-term interest rates, though long-term annuity data limitations invite validation.
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This paper introduces a translation invariant recursive utility framework within dynamic risk sharing, integrating a traded annuity into the state price density. Its originality lies in accommodating heterogeneous preferences while innovatively extending traditional models. This novel approach offers insights into Quantitative Risk Management and finance, making it compelling and impactful.
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Raw abstract and provenance
- … We derive a version of the consumption based capital asset pricing model (CCAPM), with expressions for risk premiums of risky securities and for the risk-free rate of …
Source row: 1935 · abstract type: snippet