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

PDF
MPRA_paper_72732.pdf Download (211kB)  Preview 
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:  26 Jul 2016 09:41 
References:  Bansal, R., and Yaron, A., (2004) "Risk for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, vol. 54, pp.14811509. Basu, S., and Bundick, B. (2014) "Uncertainty Shocks in a Model of Effective Demand," unpublished manuscript. Bloom, N., (2014) "Fluctuations in Uncertainty," Journal of Economic Perspective, vol. 28, pp.153176. FernándezVillaverde, J., and RubioRamirez, J.F. (2013) "Macroeconomics and Volatility: Data, Models, and Estimation," In Advances in Economics and Econometrics: Tenth World Congress, Volume 3 (edited by D. Acemoglu, M. Arellano and E. Dekel), pp.137183. Gollier, C., (2001) The Economics of Risk and Time, The MIT Press. Guvenen, F., Ozkan, S., and Song, J., (2014) "The Nature of Countercyclical Income Risk," Journal of Political Economy, vol. 122, pp.621660. Kimball, M. (1990) "Precautionary Saving in the Small and in the Large," Econometrica, vol. 58, pp.5373. Kimball, M., and Weil, P. (2009) "Precautionary Saving and Consumption Smoothing across Time and Possibilities," Journal of Money, Credit and Banking, vol. 41, pp.245284. Leland, H.E. (1968) "Saving and Uncertainty: The Precautionary Demand for Saving," Quarterly Journal of Economics, vol. 82, pp.465473. Meghir, C., and Pistaferri, L., (2004) "Income Variance Dynamics and Heterogeneity," Econometrica, vol. 72, pp.132. Niculescu, C., and Persson, L.E. (2006) Convex Functions and their Applications, Springer. Rockafellar, R.T., (1970) Convex Analysis, Princeton University Press. Sandmo, A. (1970) "The Effect of Uncertainty on Saving Decisions." Review of Economic Studies, vol. 37, pp.353360. Shaked, M., and Shanthikumar, J.G., (2007) Stochastic Ordering, Springer. Sim, C., and Zha. T., (2006) "Were There Regime Switches in U.S. Monetary Policy?" American Economic Review, vol. 96, pp.5481. Stock, J.H., and Watson, M.W., (2002) "Has the Business Cycle Changed and Why?" In NBER Macroeconomics Annual 2002 (edited by. M. Gertler and K. Rogoff), pp.159218. The MIT Press. Storesletten, K., Telmer, C.I., and Yaron, A., (2004) "Cyclical Dynamics in Idiosyncratic Labor Market Risk." Journal of Political Economy, vol. 112, pp.695717. Teicher, H., (1960) "On the Mixture of Distributions," Annals of Mathematical Statistics, vol. 31, pp.5573. Topkis, D.M., (1998) Supermodularity and Complementarity, Princeton University Press. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/72732 