Template-Type: ReDIF-Paper 1.0
Author-Name:  Gianluca Femminis
Author-X-Name-First: Gianluca
Author-X-Name-Last: Femminis
Author-Email: gianluca.femminis@unicatt.it
Author-Workplace-Name: DISCE,Università Cattolica
Title: Risk aversion heterogeneity and the investment-uncertainty relationship
Abstract: A simple dynamic general equilibrium model of savings and investment is populated by agents with Kreps-Porteus preferences. Households are heterogeneous in their risk aversion, which explains the negative relationship between aggregate investment and aggregate uncertainty. Agents trade a riskless assets to share the aggregate risk, so that in equilibrium a higher uncertainty induces the low risk-averse individuals to increase their position in the risky asset, and the highly risk averse agents to increase their share of safe bonds. This portfolio effect increases the certainty-equivalent future returns; in response to this rise, savings and investment decrease due to a limited willingness to substitute consumption over time. 
Length: 49 pages
Creation-Date: 2012-01
Publication-Status: none
File-URL: http://istituti.unicatt.it/teoria_economica_metodi_quantitativi_itemq1260.pdf
File-Format: Application/pdf
File-Function: First version, 2012
Number: itemq1260
Classification-JEL: D92; E22
Keywords: Aggregate investment; uncertainty; risk aversion; heterogeneity.
Handle: RePEc:ctc:serie6:itemq1260