Suen, Richard M. H. (2016): Distributional Risk, Stochastic Volatility and Precautionary Savings.

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Abstract
This paper analyses the optimal saving behaviour of a riskaverse and prudent consumer who faces two sources of income risk: risk as described by a given probability distribution and risk in the distribution itself. The latter is captured by the randomness in the parameters underlying the probability distribution and is referred to as distributional risk. Stochastic volatility, which generally refers to the randomness in the variance, can be viewed as a form of distributional risk. Necessary and sufficient conditions by which an increase in distributional risk will induce the consumer to save more are derived under two specifications of preferences: expected utility preferences and Selden/KrepsPorteus preferences. The connection (or lack of) between these conditions and stochastic volatility is addressed. The additional conditions under which a prudent consumer will save more under greater volatility risk are identified.
Item Type:  MPRA Paper 

Original Title:  Distributional Risk, Stochastic Volatility and Precautionary Savings 
Language:  English 
Keywords:  Stochastic volatility, stochastic convexity, precautionary saving. 
Subjects:  D  Microeconomics > D8  Information, Knowledge, and Uncertainty > D81  Criteria for DecisionMaking under Risk and Uncertainty D  Microeconomics > D9  Intertemporal Choice > D91  Intertemporal Household Choice ; Life Cycle Models and Saving E  Macroeconomics and Monetary Economics > E2  Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21  Consumption ; Saving ; Wealth 
Item ID:  72732 
Depositing User:  Richard M. H. Suen 
Date Deposited:  25 Jul 2016 14:16 
Last Modified:  27 Sep 2019 18:25 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/72732 