Multivariate risk aversion and intertemporal substitution

Research output: Contribution to journalArticle

1 Citation (Scopus)

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 languageEnglish (US)
Pages (from-to)159-169
Number of pages11
JournalThe GENEVA Papers on Risk and Insurance Theory
Volume17
Issue number2
DOIs
StatePublished - Dec 1992

Fingerprint

Risk aversion
Multivariate risk
Intertemporal substitution
Elasticity of substitution
Acceptance
Relative risk aversion
Optimal consumption

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.

In: The GENEVA Papers on Risk and Insurance Theory, Vol. 17, No. 2, 12.1992, p. 159-169.

Research output: Contribution to journalArticle

@article{f0e24337e1384599819881cc8b4b0158,
title = "Multivariate risk aversion and intertemporal substitution",
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.",
keywords = "Intertemporal Substitution, Multivariate Risk Aversion",
author = "Edward Schlee",
year = "1992",
month = "12",
doi = "10.1007/BF00962712",
language = "English (US)",
volume = "17",
pages = "159--169",
journal = "GENEVA Risk and Insurance Review",
issn = "1554-964X",
publisher = "Kluwer Academic Publishers",
number = "2",

}

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 -