Risk aversion heterogeneity and the investment–uncertainty relationship

  • Gianluca FemminisEmail author


We develop a dynamic macroeconomic model encompassing heterogeneity in households’ attitudes towards risk, and we allow agents to share aggregate volatility by trading safe assets. In equilibrium, when volatility increases, low-risk-averse households, who hold a long position in risky assets, perceive a higher certainty-equivalent future return on capital. The perceived yield may also increase for high-risk-averse agents, who hold riskless assets. In response to a rise in certainty-equivalent expected returns, savings decrease due to a limited willingness to substitute consumption over time. This generates a negative response of aggregate investment to an increase in systematic volatility, showing that the aggregate behavior of an heterogeneous agents economy can be different from the behavior originating from an ‘average’ representative agent. The appearance of degenerate wealth distributions is avoided by allowing the risk aversion of each household to change stochastically over time.


Aggregate investment Volatility Risk aversion Heterogeneity 

JEL Classification

D92 E22 



For valuable comments and suggestions, I wish to thank the Editor, Giacomo Corneo, two anonymous Referees, Robert Chirinko, Luca Colombo, Marco Cozzi, Marco Maffezzoli, Hervè Roche, and Joseph Zeira. I am also grateful for the useful feedbacks from the seminar participants at the 5th Polhia Workshop, at the 26th E.E.A. Annual Conference, and at the 18th Conference on Computing in Economics and Finance. Financial support from the European Community Seventh Framework Program (FP7/2007-2013) under Socio-Economic Sciences and Humanities, Grant Agreement No. 225408, Project “Monetary, Fiscal and Structural Policies with Heterogeneous Agents (POLHIA)” is gratefully acknowledged.


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© Springer-Verlag GmbH Austria, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Economics and FinanceUniversità Cattolica di MilanoMilanItaly

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