The Role of Risk Aversion and Intertemporal Substitution in Dynamic Consumption-Portfolio Choice with Recursive Utility

28 Pages Posted: 21 Jul 2003

See all articles by Harjoat Singh Bhamra

Harjoat Singh Bhamra

Imperial College Business School

Raman Uppal

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2003

Abstract

The objective of this note is to understand the implications for consumption and portfolio choice of the separation of an investor's risk aversion and elasticity of intertemporal substitution that is made possible by recursive utility, in contrast to expected utility where the two are dictated by the same parameter. In particular, we study whether the optimal consumption and portfolio decisions depend on risk aversion, elasticity of intertemporal substitution, or both. We find that, in general, the consumption and portfolio decisions depend on both risk aversion and the elasticity of intertemporal substitution. Only in the case where the investment opportunity set is constant, is the optimal portfolio weight independent of the elasticity of intertemporal substitution, though even in this case the consumption decision depends on both risk aversion and elasticity of intertemporal substitution.

Keywords: Intertemporal optimization and decision making

Suggested Citation

Bhamra, Harjoat Singh and Uppal, Raman, The Role of Risk Aversion and Intertemporal Substitution in Dynamic Consumption-Portfolio Choice with Recursive Utility (February 2003). EFA 2003 Annual Conference Paper No. 267; Sauder School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=423960 or http://dx.doi.org/10.2139/ssrn.423960

Harjoat Singh Bhamra (Contact Author)

Imperial College Business School ( email )

Tanaka Building
Exhibition Rd
London, SW7 2AZ
United Kingdom

HOME PAGE: http://www.harjoatbhamra.com

Raman Uppal

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
295
Abstract Views
1,690
rank
95,620
PlumX Metrics