Changes in Risk and the Demand for Saving
34 Pages Posted: 8 Sep 2008
Date Written: September 2008
Abstract
How does risk affect saving? Empirical work typically examines the effects of detectible differences in risk within the data. How these differences affect saving in theoretical models depends on the metric one uses for risk. For labor-income risk, second-degree increases in risk require prudence to induce increased saving demand. However, prudence is not necessary for first-degree risk increases and not sufficient for higher-degree risk increases. For increases in interest rate risk, a precautionary effect and a substitution effect need to be compared. This paper provides necessary and sufficient conditions on preferences for an Nth-degree change in risk to increase saving.
Keywords: precautionary saving, prudence, stochastic dominance, temperance
JEL Classification: D81, E21
Suggested Citation: Suggested Citation
Here is the Coronavirus
related research on SSRN
Recommended Papers
-
Exploring Higher-Order Risk Effects
By Cary A. Deck and Harris Schlesinger
-
Conditions Ensuring the Decomposition of Asset Demand for All Risk-Averse Investors
By Kais Dachraoui and Georges Dionne
-
An Extension of the Consumption-Based CAPM Model
By Georges Dionne, Jingyuan Li, ...
-
An Alternative Representation of the C-CAPM with Higher-Order Risks
By Georges Dionne, Jingyuan Li, ...
-
A Theoretical Extension of the Consumption-Based CAPM Model
By Georges Dionne and Jingyuan Li
