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Article: Ignorance, Pervasive Uncertainty, and Household Finance

TitleIgnorance, Pervasive Uncertainty, and Household Finance
Authors
KeywordsIgnorance
Unknown income growth
Pervasive uncertainty
Strategic asset allocation
Issue Date2021
PublisherAcademic Press. The Journal's web site is located at http://www.elsevier.com/locate/jet
Citation
Journal of Economic Theory, 2021, Epub 2021-01-28, p. article no. 105204 How to Cite?
AbstractThis paper studies how the two types of uncertainty due to ignorance, parameter and model uncertainty, jointly affect strategic consumption-portfolio rules, precautionary savings, and welfare. We incorporate these two types of uncertainty into a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth, and derive analytical solutions and testable implications. We show that the interaction between the two types of uncertainty plays a key role in determining the demand for precautionary savings and risky assets. We derive formulas to evaluate both marginal and total welfare costs of ignorance-induced uncertainty and show they are significant for plausible parameter values.
Persistent Identifierhttp://hdl.handle.net/10722/295827
ISSN
2023 Impact Factor: 1.4
2023 SCImago Journal Rankings: 3.218
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorLuo, Y-
dc.contributor.authorNie, J-
dc.contributor.authorWang, H-
dc.date.accessioned2021-02-08T08:14:34Z-
dc.date.available2021-02-08T08:14:34Z-
dc.date.issued2021-
dc.identifier.citationJournal of Economic Theory, 2021, Epub 2021-01-28, p. article no. 105204-
dc.identifier.issn0022-0531-
dc.identifier.urihttp://hdl.handle.net/10722/295827-
dc.description.abstractThis paper studies how the two types of uncertainty due to ignorance, parameter and model uncertainty, jointly affect strategic consumption-portfolio rules, precautionary savings, and welfare. We incorporate these two types of uncertainty into a recursive utility version of a canonical Merton (1971) model with uninsurable labor income and unknown income growth, and derive analytical solutions and testable implications. We show that the interaction between the two types of uncertainty plays a key role in determining the demand for precautionary savings and risky assets. We derive formulas to evaluate both marginal and total welfare costs of ignorance-induced uncertainty and show they are significant for plausible parameter values.-
dc.languageeng-
dc.publisherAcademic Press. The Journal's web site is located at http://www.elsevier.com/locate/jet-
dc.relation.ispartofJournal of Economic Theory-
dc.subjectIgnorance-
dc.subjectUnknown income growth-
dc.subjectPervasive uncertainty-
dc.subjectStrategic asset allocation-
dc.titleIgnorance, Pervasive Uncertainty, and Household Finance-
dc.typeArticle-
dc.identifier.emailLuo, Y: yuleiluo@hku.hk-
dc.identifier.authorityLuo, Y=rp01083-
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.jet.2021.105204-
dc.identifier.scopuseid_2-s2.0-85100441514-
dc.identifier.hkuros321170-
dc.identifier.volumeEpub 2021-01-28-
dc.identifier.spagearticle no. 105204-
dc.identifier.epagearticle no. 105204-
dc.identifier.isiWOS:000826711800013-
dc.publisher.placeUnited States-

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