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Long-Run Consumption Risk And Asset Allocation Under Recursive Utility And Rational Inattention, Yulei Luo, Eric R. Young
Long-Run Consumption Risk And Asset Allocation Under Recursive Utility And Rational Inattention, Yulei Luo, Eric R. Young
Yulei Luo
We study the portfolio decision of a household with limited information-processing capacity (rational inattention or RI) in a setting with recursive utility. We find that rational inattention combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets, even when the departure from standard expected utility with rational expectations is small. In addition, we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long-run risk and thus require higher compensation in equilibrium. Our results are robust …
Slow Information Diffusion And The Inertial Behavior Of Durable Consumption, Yulei Luo, Jun Nie, Eric Young
Slow Information Diffusion And The Inertial Behavior Of Durable Consumption, Yulei Luo, Jun Nie, Eric Young
Yulei Luo
This paper studies the aggregate dynamics of durable and nondurable consumption under slow information diffusion (SID) due to noisy observations and learning within the permanent income framework. We show that SID can significantly improve the model's predictions on the joint behavior of income, durable consumption, and nondurable consumption at the aggregate level. Specifically, we find that SID can significantly improve the model's predictions for: (i) smoothness in durable and nondurable consumption, (ii) autocorrelation of durable consumption, and (iii) contemporaneous correlation between durable and nondurable consumption.