Recursive utility under uncertainty by Chew, Soo Hong

Cover of: Recursive utility under uncertainty | Chew, Soo Hong

Published by Dept. of Economics and Institute for Policy Analysis, University of Toronto in Toronto .

Written in English

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  • Utility theory -- Mathematical models.,
  • Recursive functions.

Edition Notes

Book details

Statementby S. H. Chew, L. G. Epstein.
SeriesWorking paper series / Dept. of Economics and Institute for Policy Analysis, University of Toronto -- no. 9005, Working paper series (University of Toronto. Institute for Policy Analysis) -- no. 9005
ContributionsEpstein, Larry G., University of Toronto. Institute for Policy Analysis., University of Toronto. Dept. of Economics.
LC ClassificationsHB135 .C45 1990
The Physical Object
Pagination25, [1] p. :
Number of Pages25
ID Numbers
Open LibraryOL17291895M

Download Recursive utility under uncertainty

Boyd, J.,“Recursive Utility and the Ramsey Problem,” J. Econ. The – CrossRef Google ScholarCited by:   Second, additive utility is insensitive to uncertainty about the long-run fundamentals of the process—or parameter uncertainty, for short.

In the example above, the agent is indifferent between process P 1, where long-run average consumption is known with certainty, and P 2, Author: Nabil I. Al-Najjar, Eran Shmaya. () Expected Utility Maximization Problem Under State Constraints and Model Uncertainty.

Journal of Optimization Theory and Applications() Maximum Principles of Markov Regime-Switching Forward–Backward Stochastic Differential Cited by: This paper presents an axiomatic foundation for recursive utility that captures the role of the timing of resolution of uncertainty without relying on exogenously specified objective beliefs.

Two main representation results are proved. Under uncertainty, the recursive gain/loss asymmetric Recursive utility under uncertainty book satisfies the following stochastic recursive equation:(3)Ut({cτ}τ≥t)=Et[ϕ(essinfδ∈[δ̲t+1,δ¯t+1]{(1−δ)u(ct)+δϕ−1(Ut+1({cτ}τ≥t+1))})],where ϕis a continuous and strictly increasing function from Rto R,ϕ−1is the functional inverse of ϕ, and Etis a Author: Yuki Shigeta.

Downloadable (with restrictions). This paper axiomatizes a recursive utility model that captures both intertemporal utility smoothing defined across time and ambiguity aversion defined over states. The resulting representation adapts Wakai (Econometrica –, ) model of intertemporal utility smoothing as an aggregator function, where the utility of the certainty equivalent of.

The purpose of this book is to collect the fundamental results for decision making under uncertainty in one place, much as the book by Puterman [] on Markov decision processes did for Markov decision process theory.

In partic-ular, the aim is to give a uni ed account of algorithms and theory for sequential. With expected utility, you are indifferent between these lotteries, but with EZ lottery B is prefered iff >ˆ: In general, early resolution of uncertainty is preferred if and only if >ˆi.e. risk aversion > 1 IES:This is another way to motivate these preferences, since early resolution seems intuitively preferable.

Contents 5ApplicationsofDynamicProgrammingunderCertainty TheOne-SectorModelofOptimalGrowth A“Cake-Eating”Problem 5. This book describes recursive models applied to theoretical questions in monetary policy, fiscal policy, taxation, economic growth, search theory, and labor economics.

We study a maximization problem from terminal wealth and consumption for a class of robust utility functions introduced in Bordigoni, Matoussi, and Schweizer [A stochastic control approach to a rob. The book goes on to treat equilibrium analysis, covering a variety of core macroeconomic models, and such additional topics as recursive utility (increasingly used in finance and macroeconomics), dynamic games, and recursive contracts.

Recursive Utility in Discrete Time: Two Representations (pg. ) Recursive Utility: Continuous Time (pg. ) Individual Investor Optimality (pg. ) Equilibrium with Recursive Utility in Complete Markets (pg. ) Back to the Puzzles: Pricing under Recursive Utility (pg.

) Conclusion (pg. This has spurred the development of new areas for research such as nonlinear dynamic expectation theory, e.g., g and G-expectation, and path-dependent partial differential equations, while also finding new applications for problems of ambiguity, uncertainty, quantitative risk, and recursive utility in finance and economics.

In a continuous-time setting with Brownian and Poissonian uncertainty, this paper formulates recursive utility under two smooth certainty equivalent (CE) types that have been proposed as. Downloadable. This paper axiomatizes an intertemporal version of multiple-ptiors utility.

A central axiom is dynamic consistency, which leads to a recursive structure for utility, to 'rectangular' sets of priors and to prior-by-prior Bayesian updating as the updating rule for such sets of priors. It is argued that dynamic consitency is intuitive in a wide range of situations and that the model.

bad uncertainty. Hence, both uncertainty risks contribute positively to risk premia, and help explain the cross-section of expected returns beyond cash flow risk.

Keywords: Uncertainty, economic growth, asset prices, recursive utility JEL: G12, E20, C Recursive utility under uncertainty, in M.A. Khan and N.C. Yannelis eds., Equilibrium Theory in Infinite Dimensional Spaceswith Chew Soo Hong; Mixture symmetry and quadratic utility, Econometricawith Chew Soo Hong and Uzi Segal.

other than expected utility. Under objective risk, neutrality toward timing (or preference for early resolution) cannot be combined with nonexpected util-ity preferences: any certainty equivalent other than E necessarily produces a nonuniform attitude to temporal resolution.

Overview of Results This paper studies choice under uncertainty. optimality and state pricing in constrained financial markets with recursive utility under continuous and discontinuous information Mathematical Finance, Vol. 18, No. 2 Foundations of Continuous-Time Recursive Utility: Differentiability and Normalization of Certainty Equivalents.

In economics, Epstein–Zin preferences refers to a specification of recursive utility. A recursive utility function can be constructed from two components: a time aggregator that characterizes preferences in the absence of uncertainty and a risk aggregator that defines the certainty equivalent function that characterizes preferences over static gambles and is used to aggregate the risk.

A principal feature of recursive utility, that distinguishes it from time-separable expected utility, is its dependence on the timing of resolution of uncertainty. Recursive Models of Dynamic Linear Economies Lars Hansen University of Chicago Utility of Income. Consumption Externalities.

Tax Smooth-ing Models. under Uncertainty. Equilibrium Prices in the Adjustment Cost Economies. Periodic Models of Seasonality Recent News. On WAMU’s 1A, Burning the Books author Richard Ovenden considered the danger of deliberate destruction of documents by Trump administration officials on their way out the door.; Benjamin Francis-Fallon, author of The Rise of the Latino Vote, explained in the Washington Post how election results affirmed decades-old political divisions among the American voters frequently.

Choice under Uncertainty Jonathan Levin October () in their book Theory of Games and Economic Be-havior. Remarkably, they viewed the development of the expected utility model uncertainty.

Expected Utility We now introduce the idea of an expected utility function. Ambiguity (Knightian Uncertainty), Backward stochastic differential equations, nonlinear expectation, and path-dependent PDEs, Dynamic risk measures, Mathematical modelling under uncertainty, Quantitative risks, Recursive Utility, Uncertainty quantification, Computational aspects and numerical methods pertinent to the above topics.

This paper generalizes, in the setting of Brownian information, the Duffie–Epstein () stochastic differential formulation of intertemporal recursive utility (SDU).

We provide a utility functional of state-contingent consumption plans that exhibits a local dependency with respect to the utility intensity process (the integrand of the quadratic variation) and call it the generalized SDU. The new FIER algorithm under both interval probabilistic and fuzzy uncertainties Based on the fuzzy assessment set HF, a FIER (Fuzzy Interval grade ER) recursive algorithm is developed as follows using the similar technique used in Yang and Singh and Yang, et al (the detailed proof is shown in the Appendix).

mH mH%. dynamics of inflation and growth had just become less well under-stood. We study the effect of inflation as bad news in a simple representa-tive agent asset pricing model with two key ingredients.

First, investor preferences are described by recursive utility. One attractive feature of. Gundel, A.: Robust utility maximization for complete and incomplete market models.

Finance Stoch. 9, () Google Scholar Cross Ref Øksendal, B., Sulem, A.: Forwardbackward stochastic differential games and stochastic control under model uncertainty.

[6] «Energy-saving Technology Adoption under Uncertainty in the Residential Sector», (with Dorothée Charlier and Alejandro Mosino, U. de Savoie) Annales d’Economie et Statistique, Vol.[7] «Abatement Technology Adoption under Uncertainty» (with Katheline Schubert, PSE) Macroeconomic Dynamics, Vol.

13(4), p.Recursive utility functions are more general then the above parametrisation but this one is arguably the most common one. Agents are clearly risk-averse (dislike variation across different states) and clearly prefer an early resolution of uncertainty. The Technium Summary.

THE TECHNIUM is a selection of essays taken from The Technium posts written prior to will appear in the book. The original essays (written in English) have been translated into Japanese or Chinese; each book selects a different list of posts.

Under Poisson uncertainty, a smooth divergence CE can be approximated with an expected-utility CE if and only if it is of the entropic type. A nonentropic divergence CE results in a new class of continuous-time recursive utilities that price Brownian and Poissonian risks differently.

This chapter solves the optimal consumption and investment decisions of a rational individual in various settings. First, the simple one-period framework is considered, where straightforward utility-maximization under the appropriate budget constraint implies that the marginal rate of substitution of the individual - the ratio of marginal utility of future consumption to marginal utility of.

“Induced Uncertainty, Market Price of Risk, and the Dynamics of Consumption and Wealth,” (with Eric R. Young), Journal of Economic Theory, pp. (Lead Article) “Long-run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention,”. With more and more scholars studying, g-expectation has become a powerful tool for studying recursive utility theory and financial risk measurement [2] [3] [4].

The concept of g-expectation can be applied to handle a set of uncertain probabilities by reference probability P. Under what economists call a ‘time separable power utility’ specification of investor preferences commonly used in macroeconomics, a decision maker views the two lotteries as comparable.

In a more general ‘recursive utility’ specification, the intertemporal composition of risk can matter. Recursive Methods in Economic Dynamics [Nancy L. Stokey]. This rigorous but brilliantly lucid book presents a self-contained treatment of modern economic dynamics. Stokey, Lucas, and Prescott develop the basic methods of recursive analysis and illust.

For the most part, although not entirely, the first three chapters are a compression of Chapters 2 through 4 of my book Random Processes for Image and Signal Processing, aimed directly at providing a tight background for optimal signal processing under uncertainty, the goal being to make a one-semester course for Ph.D.

students. Indeed, the. This paper describes links between the max- min expected utility theory of Itzhak Gilboa and David Schmeidler () and the applications of robust-control theory proposed by Evan Anderson et al. () and Paul Dupuis et al. ().l The max-min expected-utility theory represents uncertainty aversion with preference orderings over decisions c and states x, for example, of the form.Arash Molavi Vasséi Recursive utility, increasing impatience and capital deepening: F.A.

Hayek's ‘utility analysis and interest’, The European Journal of the History of Economic Thou no.6 6 .ian uncertainty. Under Poisson uncertainty, a smooth divergence CE can be approximated with an expected-utility CE if and only if it is of the entropic type.

A nonentropic divergence CE results in a new class of continuous-time recursive utilities that price Brownian and Poisson-ian .

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