We consider a dynamic general equilibrium model with incomplete markets in which we derive conditions for separating the savings decision from the asset allocation decision. It is shown that with logarithmic utility functions this separation holds for any heterogeneity of discount factors while...

This paper reveals that the class of affine term structure models introduced by Duffie and Kan (1996) is much larger than it has been usually considered in the literature. We study "fundamental" risk factors, which represent multivariate risk aversion of the consumer volatility matrix of the...

Due to their underlying assumptions, the standard concepts of risk aversion and preference for the present are generally defined separately and represented by scalar measures, and this implies many shortcomings. More specifically, if measured by a scalar, the risk aversion remains unchanged,...

Markowitz and Sharpe won the Nobel Prize in Economics more than a decade ago for the development of Mean-Variance analysis and the Capital Asset Pricing Model (CAPM). In the year 2002, Kahneman won the Nobel Prize in Economics for the development of Prospect Theory. Can these two apparently...

We study the equilibrium pricing sects of a sentiment for pessimism. Pessimism has the form of Knightian model uncertainty aversion for a neighborhood of indistinguishable model specifications that are constrained in their relative entropy from a given reft ence model. We fully characterise the...

This paper introduces state dependent utility into the standard Mehra and Prescott (1985) economy by allowing the representative agents coefficient of relative risk aversion to vary with the underlying economys growth rate. Existence of equilibrium is proved and its asymptotic properties...

We observe that the standard variant of Prospect Theory cannot describe very risk-averse choices in simple lotteries. This makes it diffcult to accommodate it with experimental data. Using an exponential value function can solve this problem and allows to cover the whole spectrum of risk-averse...