Logo
Munich Personal RePEc Archive

Long-run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention

Luo, Yulei and Young, Eric (2013): Long-run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention.

This is the latest version of this item.

[thumbnail of MPRA_paper_52904.pdf]
Preview
PDF
MPRA_paper_52904.pdf

Download (459kB) | Preview

Abstract

We study the portfolio decision of a household with limited information-processing capacity (rational inattention or RI) in a setting with recursive utility. We find that rational inattention combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets, even when the departure from standard expected utility with rational expectations is small. In addition, we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long-run risk and thus require higher compensation in equilibrium. Our results are robust to the presence of correlation between the equity return and the RI-induced noise and the presence of non-tradable labor income.

Available Versions of this Item

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.