In dynamic stochastic models, standard utility function specifications imply that the curvature of this function determines directly both the risk aversion and the elasticity of intertemporal substitution. When calibrating this, modelers have a tendency to be waving hands a bit too much, as they focus more on one than the other. In addition, their calibration seems to be immune to changes in data frequency. Those who are careful about this use Epstein-Zin preferences which disentangle risk aversion and the elasticity of intertemporal substitution. They think they have done all they could to address a proper calibration.
Well, not quite. Larry Epstein, Emmanuel Farhi and Tomasz Strzalecki show there is a third dimension in play, the temporal resolution of long-run risk. Indeed, the interaction of risk aversion and elasticity determines whether economic agents prefer early or late resolution of risk. This matters. Indeed, long-run risk is priced by markets differently than short-term risk, typically higher. Indeed, people are willing to pay to know uncertain outcomes earlier. But we do not know how much so far. An opportunity for additional research.
Well, not quite. Larry Epstein, Emmanuel Farhi and Tomasz Strzalecki show there is a third dimension in play, the temporal resolution of long-run risk. Indeed, the interaction of risk aversion and elasticity determines whether economic agents prefer early or late resolution of risk. This matters. Indeed, long-run risk is priced by markets differently than short-term risk, typically higher. Indeed, people are willing to pay to know uncertain outcomes earlier. But we do not know how much so far. An opportunity for additional research.
Hiç yorum yok:
Yorum Gönder