Habit persistence reduces risk aversion

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      <subfield code="a">Habit persistence reduces risk aversion</subfield>
      <subfield code="c">Christian Gollier</subfield>
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      <subfield code="a">How does habit formation affect the dynamic demand for insurance and risky assets? We examine a dynamic portfolio-saving choice problem for two structure of preferences. In the first model, the consurner faces an exogenous path of mínimumlevels of subsistence over time. In the second rnodel, these levels are subject t  habit persistence, i.e. they are increasing in past consumption. We show that adding habit persistence to the initial model substantially reduces the aversion to risk. Theintuition is that the positive correlation between current portfolio returns and future levels of subsistence helps time-diversifying risks. This result goes against the widesprea idea that habit persistence can resolve the equity premium puzzle.</subfield>
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      <subfield code="t">Geneva papers on risk and insurance : issues and practice</subfield>
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      <subfield code="g">01/04/2021 Volumen 46 Número 2 - abril 2021 , p. 214-222</subfield>
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