In this article, we show how the degree of risk aversion, discounting, and preference for intertemporal substitution for a natural resource manager can be structurally estimated within a recursive utility framework. We focus on the management of a reservoir in California, and test the data for consistency with a recursive utility model specification versus standard time-additive separability. T...

We are concerned with the optimal investment and consumption in a continuous-time setting for a constant absolute risk aversion (CARA) investor who faces proportional transaction costs and finite horizon. This is a singular stochastic control problem and the associated value function is governed by a variational inequality equation with gradient constraints. In terms of a novel approach develop...

We consider an environment of a fixed size that can be converted to another use. This conversion can be made in steps, but it is irreversible. The future benefits (per unit) from the original use, and from the alternative use, follow a diffusion process. For a fairly general case, we show that the value function must be the unique (viscosity) solution to the associated Hamilton-Jacobi-Bellman e...

Over the past fteen years, the theory of choice under uncertainty has undergone radical change. The pivotal contribution was Machinaas (1982) demonstration that a large class of preferences could be locally approximated by expected-utility func-tionals and that global preferences inherited properties, such as risk aversion, of the local utility functions. Less progress has been made, however, i...

We consider an investor who faces parameter uncertainty in a continuous-time financial market. We model the investor’s preference by a power utility function leading to constant relative risk aversion. We show that the loss in expected utility is large when using a simple plug-in strategy for unknown parameters. We also provide theoretical results that show the trade-off between holding a well-...

We conduct a controlled laboratory experiment where subjects dynamically choose their portfolio allocation between a safe and a risky asset. We first derive analytically the optimal allocation of an expected utility maximizer with HARA utility function. We then fit the experimental choices to this model to assess the risk attitude of our subjects. Despite the substantial heterogeneity across su...

We extend the theory of asymmetric information in mispricing models for stocks following geometric Brownian motion to constant relative risk averse investors. Mispricing follows a continuous mean–reverting Ornstein–Uhlenbeck process. Optimal portfolios and maximum expected log–linear utilities from terminal wealth for informed and uninformed investors are derived. We obtain analogous but more g...

Risk management and the thorough understanding of the relations between financial markets and the standard theory of macroeconomics have always been among the topics most addressed by researchers, both financial mathematicians and economists. This work aims at explaining investors’ behavior from a macroeconomic aspect (modeled by the investors’ pricing kernel and their relative risk aversion) u...

We analyze a class of ‘large group’ Chamberlinian monopolistic competition models using multiplicatively quasi-separable (MQS) and additively quasi-separable (AQS) functions. We first prove that the MQS and AQS functions are equivalent to the ‘constant relative risk aversion’ (CRRA) and ‘constant absolute risk aversion’ (CARA) classes of functions, respectively. Whereas both approaches allow fo...

10 We examine risk preferences in an urban setting in a low-income developing country with nonstudent subjects by adapting the experimental approach of Holt and Laury (2002) (HL). We conducted 22 group experiments with 404 participants and used in-kind payoffs. The average respondent was ‘riskaverse’ (the midpoint of Constant Relative Risk Aversion (CRRA) intervals 15 among participants was 0.5...