Working Paper: Recursive Preferences, Correlation Aversion, and the Temporal Resolution of Uncertainty
Abstract
Models of recursive utility are of central importance in many economic applications. This paper investigates a new behavioral feature exhibited by these models: aversion to risks that exhibit persistence (positive autocorrelation) through time, referred to as correlation aversion. I introduce a formal notion of such a property and provide a characterization based on risk attitudes, and show that correlation averse preferences admit a specific variational representation. I discuss how these findings imply that attitudes toward correlation are a crucial behavioral aspect driving the applications of recursive utility in fields such as asset pricing, climate policy, and optimal fiscal policy.
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Lorenzo Maria Stanca
Assistant Professor of Economics
Greetings! I hold concurrent appointments as an Assistant Professor at Collegio Carlo Alberto and within the Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) at the University of Turin. My academic focus is centered on economic theory, with a particular emphasis on decision theory.