## Abstract

Researchers often assume that preferences over uncertain consumption streams are representable by {Mathematical expression}, where {Mathematical expression}, is (random) period t consumption. It is moreover often asserted that estimates of γ cannot be unambiguously interpreted, since the quantity 1 - γ measures both relative risk aversion and the reciprocal of the elasticity of substitution. Clearly, this ambiguity arises only if 1 - γ indeed measures risk aversion. Although changes in γ cannot reflect changes in risk aversion according to standard definitions of comparative multivariate risk aversion, we show that γ is rationalizable as a risk aversion measure provided that the "acceptance set" of sure prospects is restricted. We also show, however, that there is essentially no relationship between changes in γ and optimal consumption, even in a simple two period model; this finding casts doubt upon the interpretation of γ as a risk aversion measure.

Original language | English (US) |
---|---|

Pages (from-to) | 159-169 |

Number of pages | 11 |

Journal | The GENEVA Papers on Risk and Insurance Theory |

Volume | 17 |

Issue number | 2 |

DOIs | |

State | Published - Dec 1992 |

## Keywords

- Intertemporal Substitution
- Multivariate Risk Aversion

## ASJC Scopus subject areas

- Accounting
- Business, Management and Accounting(all)
- Finance
- Economics and Econometrics