Recursive preferences, correlation aversion, and the temporal resolution of uncertainty

Lorenzo Stanca ()
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Lorenzo Stanca: Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) and Collegio Carlo Alberto, University of Torino, Italy;

No 80, Working papers from Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino

Abstract: Models of recursive utility are of central importance in many economic applications. This paper investigates a new behavioral feature exhibited by these models: aversion to risks that exhibit persistence (positive autocorrelation) through time, referred to as correlation aversion. I introduce a formal notion of such a property and provide a characterization based on risk attitudes, and show that correlation averse preferences admit a specific variational representation. I discuss how these findings imply that attitudes toward correlation are a crucial behavioral aspect driving the applications of recursive utility in fields such as asset pricing, climate policy, and optimal fiscal policy.

Keywords: Intertemporal Substitution; Risk Aversion; Correlation Aversion; Recursive Utility; Preference for Early Resolution of Uncertainty; Information. (search for similar items in EconPapers)
JEL-codes: C61 D81 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2023-04
New Economics Papers: this item is included in nep-des, nep-mac, nep-rmg and nep-upt
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