Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)
Knut K. Aase
Recursive utility and jump-diffusions
Abstract: We derive the equilibrium interest rate and risk premiums
using recursive utility for jump-diffusions. Compared to to the continuous
version, including jumps allows for a separate risk aversion related to
jump size risk in addition to risk aversion related to the continuous part.
We also consider a version that allows marginal utility to depend on past
consumption. The models with jumps are shown to have a potential to give
better explanation of empirical regularities than the recursive models
based on merely continuous dynamics.
Keywords: Recursive utility; jump dynamics; the stochastic maximum principle; early resolution; utility gradients; (follow links to similar papers)
JEL-Codes: D51; D53; D90; E21; G10; G12; (follow links to similar papers)
41 pages, March 25, 2014
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