Recursive Utility and Jump-Diffusions

42 Pages Posted: 27 Mar 2014

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2014

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

JEL Classification: D51, D53, D90, E21, G10, G12

Suggested Citation

Aase, Knut K., Recursive Utility and Jump-Diffusions (March 25, 2014). NHH Dept. of Business and Management Science Discussion Paper No. 2014/9. Available at SSRN: https://ssrn.com/abstract=2416262 or http://dx.doi.org/10.2139/ssrn.2416262

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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