Epstein-Zin preferences

In economics, Epstein-Zin preferences are the preferences over the stream of consumption given by:

:

where the degree of risk aversion is governed by $gamma$, the elasticity of intertemporal substitution is governed by $psi$, entering the utility formula because $heta$ is defined as:

:$heta\; =\; frac\{1-gamma\}\{1-1/psi\}$

The aim of such a utility function is to disentangle the elasticity of intertemporal substitution from the coefficient of relative risk aversion.

ee also

*Elasticity of substitution

References

* "The Equity Premium: It's Still a Puzzle", Narayana R. Kocherlakota, Journal of Economic Literature, Vol. 34, No. 1. (Mar., 1996), pp. 42-71. (JSTOR: [http://links.jstor.org/sici?sici=0022-0515%28199603%2934%3A1%3C42%3ATEPISA%3E2.0.CO%3B2-X] )