Recursive Utility and Jump-Diffusions
42 Pages Posted: 27 Mar 2014
Date Written: March 25, 2014
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
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