Models of recursive preferences are commonly associated with a preference for early resolution of uncertainty, often regarded as an important economic channel in applications. This dissertation provides a different understanding of recursive preferences based on attitudes toward correlation, and in particular aversion to intertemporally correlated risks. Part 1 provides a choice-theoretic definition of correlation aversion and investigates such a notion for the case of recursive preferences under risk. A general characterization of correlation aversion is provided based on risk attitudes. The major implication of the result is that under increasing relative risk aversion, the value of intertemporal hedging is greater than that of early resolution of uncertainty. Part 2 studies the case of recursive preferences that feature ambiguity aversion. First it is shown that unlike in the case of risk, increasing correlation may actually increase the hedging opportunities provided to the agent. As a result, recursive ambiguity averse preferences may be correlation loving. Sufficient conditions under which correlation aversion holds are provided. Part 3 shows that one can separate risk aversion from intertemporal substitution by considering a domain of choice in which pure preferences for early resolution of uncertainty play no role. More precisely, I provide an axiomatization of recursive preferences on a consumption domain in which a preference for early resolution of uncertainty cannot be elicited. Finally, I apply the insights of this paper to better understand the features possessed by existing models of recursive utility. I argue that attitudes toward correlation are the key behavioral feature driving the results of consumption-based asset pricing models. Part 4 provides results the robustness (stability) of SEU preferences.

Creator

• Stanca, Lorenzo Maria

DOI

• https://doi.org/10.21985/n2-mv8y-b456

Subject

• Economics

Language

• en

Alternate Identifier

• http://dissertations.umi.com/northwestern:15985
• etdadmin_upload_891458

Keyword

• Risk
• Ambiguity
• Robustness
• Uncertainty
• Prior selection

Date created

• 2022-01-01

Resource type

• Dissertation

Rights statement

• In Copyright