Dynamic Choice and Risk Aversion

30 Pages Posted: 13 Oct 2001

See all articles by Jun Liu

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management

Date Written: May 2001

Abstract

This paper solves explicitly a dynamic choice problem for a class of stochastic volatility models. The explicit solution is used to show that intuitions on static choice problems do not apply in a dynamic choice setting. For example, even though the risk premium of the risky asset in the problem is strictly positive, a more risk-averse agent may hold more risky assets, and a risk-averse agent may short (sometimes infinite amount of) a risky asset. I argue that these counter-intuitive results are due to rebalancing. The results suggest that it may be not appropriate to use stock holdings as a proxy for risk aversion.

Keywords: dynamic choice, risk aversion, stochastic volatility

JEL Classification: D1, D4, D9, G0

Suggested Citation

Liu, Jun, Dynamic Choice and Risk Aversion (May 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=287095 or http://dx.doi.org/10.2139/ssrn.287095

Jun Liu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858.534.2022 (Phone)
5858.534.0745 (Fax)

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