Long-run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention
نویسندگان
چکیده
We study the portfolio decision of a household with limited information-processing capacity in a setting with recursive utility. We find that rational inattention combined with a preference for early resolution of uncertainty leads 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 implied equity premium increases because inattentive investors with recursive utility face greater long-run risk and thus require higher compensation in equilibrium. JEL Classification Numbers: D53, D81, G11.
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