Centro de Documentacion de Fundación MAPFRE - Habit persistence reduces risk aversion

Notes: Sumario: 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.Related records: En: Geneva papers on risk and insurance : issues and practice. - Geneva : The Geneva Association, 1976- = ISSN 1018-5895. - 01/04/2021 Volumen 46 Número 2 - abril 2021 , p. 214-222Materia / lugar / evento: Gerencia de riesgos Formación Consumidores Other categories: 7

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