The Local Recoverability of Risk Aversion and Intertemporal Substitution
Abstract Call an economy revealing if underlying preferences are recoverable from asset prices, specifically from the prices of aggregate equity or a one-period discount bond. In a Lucas [ Econometrica 46 (1978), 1429-4444] model, with Kreps–Porteus [ Econometrica 46 1978), 185-200] nonexpected utility and Markov output growth rate process, local recoverability is shown to be a generic property. In this sense it is generically true that asset pricing models based on the more general Kreps–Porteus utility have more explanatory power than the usual expected utility, and both the risk aversion and intertemporal aspects of the Kreps–Porteus utility can be recovered from a single dynamic equilibrium. Journal of Economic Literature Classification Numbers: D11, G12, C60, D50, D80.