Homothetic Robust Preferences

Abstract

We provide a novel, non-recursive representation of homothetic robust variational preferences entertained by an agent who derives utility from both consumption and terminal wealth. We find that under the assumption of constant relative risk aversion, such preferences are observationally equivalent to preferences of an otherwise identical, but more impatient non-robust agent, who evaluates his expectations under a different probability measure. Furthermore, we explicitly characterize the set of alternative models considered by the robust agent.

Keywords: Robustness, Uncertainty, Ambiguity, Homothetic Preferences, Martingale Method

JEL Classification: C61, D01, D81, G11