Epstein-Zin preferences

From Wikipedia, the free encyclopedia

In economics, Epstein-Zin preferences are the preferences over the stream of consumption given by:

$U_t = {\{ (1-\beta) (c_t)^\frac{1-\gamma}{\theta} + \beta E_t[U_{t+1}^{1-\gamma}]^{\frac{1}{\theta}} \}} ^{\frac{\theta}{1-\gamma}}$

where the degree of risk aversion is governed by $γ$ , the elasticity of intertemporal substitution is governed by $ψ$ , entering the utility formula because $θ$ is defined as:

$\theta = \frac{1-\gamma}{1-1/\psi}$

The aim of such a utility function is to disentangle the elasticity of intertemporal substitution from the coefficient of relative risk aversion.

[edit] See also

Elasticity of substitution

[edit] References

The Equity Premium: It's Still a Puzzle, Narayana R. Kocherlakota, Journal of Economic Literature, Vol. 34, No. 1. (Mar., 1996), pp. 42-71. (JSTOR: [1])