### 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 |

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### Keywords

- Intertemporal Substitution
- Multivariate Risk Aversion

### ASJC Scopus subject areas

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

### Cite this

**Multivariate risk aversion and intertemporal substitution.** / Schlee, Edward.

Research output: Contribution to journal › Article

*The GENEVA Papers on Risk and Insurance Theory*, vol. 17, no. 2, pp. 159-169. https://doi.org/10.1007/BF00962712

}

TY - JOUR

T1 - Multivariate risk aversion and intertemporal substitution

AU - Schlee, Edward

PY - 1992/12

Y1 - 1992/12

N2 - 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.

AB - 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.

KW - Intertemporal Substitution

KW - Multivariate Risk Aversion

UR - http://www.scopus.com/inward/record.url?scp=3643118478&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=3643118478&partnerID=8YFLogxK

U2 - 10.1007/BF00962712

DO - 10.1007/BF00962712

M3 - Article

AN - SCOPUS:3643118478

VL - 17

SP - 159

EP - 169

JO - GENEVA Risk and Insurance Review

JF - GENEVA Risk and Insurance Review

SN - 1554-964X

IS - 2

ER -