The local recoverability of risk aversion and intertemporal substitution (Q2366838)

This paper considers the recoverability of the preferences of agents from asset prices. The preferences are said to be recoverable if asset prices reveal the parameters of the agents' utility function. The paper shows that in a Lucas exchange economy with the Kreps-Porteus non-expected utility function and Markov output growth, the asset prices are locally determinate, and the underlying preferences can be locally recovered if the number of observations on the output growth rate is sufficiently large. Thus, the class of Kreps-Porteus utility functions have more explanatory power than the standard expected utility function.