Precautionary Saving against Correlation under Risk and Ambiguity

Wed, 01 Jan 2025 00:00:00 +0000

Research question and motivation: How much to save is a central household financial decision, and uncertainty drives the “precautionary saving motive.” The precautionary-saving literature has mostly studied one-dimensional (single-attribute) risk, yet households face multidimensional risk: both wealth and health conditions matter for saving. Because wealth and health are plausibly related, the authors argue the correlation between two risky attributes should be incorporated into precautionary-saving analysis. They further note that correlation between two attributes is harder to quantify than a single attribute’s risk (less experience, fewer observations), so they also introduce ambiguity about the correlation. The paper’s purpose is to characterize how the correlation between two risky attributes (wealth and health) affects optimal savings under multivariate preferences, both when correlation is known (risk) and when it is ambiguous.

Takao Asano | Macro Paper Warehouse

Precautionary Saving against Correlation under Risk and Ambiguity