Necessary and Sufficient Conditions for Existence and Uniqueness of Recursive Utilities

Jaroslav Borovička, John Stachurski

    Research output: Contribution to journalArticlepeer-review

    Abstract

    We obtain exact necessary and sufficient conditions for existence and uniqueness of solutions of a class of homothetic recursive utility models postulated by Epstein and Zin. The conditions center on a single test value with a natural economic interpretation. The test sheds light on the relationship between valuation of cash flows, impatience, risk adjustment, and intertemporal substitution of consumption. We propose two methods to compute the test value when an analytical solution is not available. We further provide several applications.

    Original languageEnglish (US)
    Pages (from-to)1457-1493
    Number of pages37
    JournalJournal of Finance
    Volume75
    Issue number3
    DOIs
    StatePublished - Jun 1 2020

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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