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Post by Sapphire Capital on Sept 5, 2008 3:32:36 GMT 4
Smooth Ambiguity Aversion Toward Small Risks and Continuous-Time Recursive Utility Costis Skiadas Northwestern University - Kellogg School of Management August 20, 2008 Abstract: 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 representations of ambiguity aversion. For a smooth CE based on the formulation of Klibanoff, Marinacci, and Mukerji (Econometrica, 2005), it is argued that the corresponding continuous-time recursive utility reduces to Kreps-Porteus utility (Econometrica, 1978), that is, recursive utility with an expected utility CE. For a smooth CE based on the divergence preferences of Maccheroni, Marinacci, and Rustichini (Econometrica, 2006), the following conclusions are drawn. Under only Brownian uncertainty, the corresponding continuous-time recursive utility again reduces to the Kreps-Porteus case. Under Poissonian uncertainty, the same conclusion can be drawn if and only if the divergence CE is of the entropic type. A non-entropic divergence CE results in a new class of continuous-time smooth recursive utilities that price Brownian and Poissonian risks differently. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1238156_code27264.pdf?abstractid=1238156&mirid=2
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