A robust approach to risk aversion

Abstract

We investigate whether the set of Kreps and Porteus (1978) preferences include classes of preferences that are stationary, monotonic and well-ordered in terms of risk aversion. We prove that the class of preferences introduced by Hansen and Sargent(1995) in their robustness analysis is the only one that fulfills these properties. The paper therefore suggests a shift from the traditional approach to studying the role ofrisk aversion in recursive problems. We also provide applications, in which we discuss the impact of risk aversion on asset pricing and risk sharing.