The Local Recoverability of Risk Aversion and Intertemporal Substitution

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 [Econometrica46 (1978), 1429-4444] model, with Kreps-Porteus [Econometrica46 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.