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Switching Regression Estimates of EIS for Stockholders and Non-Stockholders

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  • Sheng Guo

    () (Department of Economics, Florida International University)

Abstract

This paper analyzes a panel data set of Panel Study of Income Dynamics (PSID) households and demonstrates that the estimate of EIS (Elasticity of Intertemporal Substitution) for stockholders and non-stockholders is large and di erent between them, based upon the consumption-based capital asset pricing model (CAPM). However, recognizing possible laxities in defining and measuring stockholding status, and hence allowing for possible misclassification error therein, I use the switching regression framework to show the evidence that there is a significant portion of stockholders misclassified as non-stockholders. The correction for this misclassification error results in closer gap of EIS between these two groups. Estimates after the correction are in line with those found in repeated cross-section Consumer Expenditure Survey (CEX) samples, whereas estimates without the correction are not. This illustrates the importance of accounting for misclassification error in such contexts. To some extent this result along with others of this research validates the use of repeated cross-section data in quatitative estimation of CAPM.

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File URL: http://casgroup.fiu.edu/pages/docs/1569/1280267703_09-03.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0903.

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Length: 25 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:fiu:wpaper:0903

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  1. Orazio P. Attanasio & Monica Paiella, 2008. "Intertemporal Consumption Choices, Transaction Costs and Limited Participation in Financial Markets: Reconciling Data and Theory," Discussion Papers 1_2008, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  2. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  3. Orazio P. Attanasio & James Banks & Sarah Tanner, 2002. "Asset Holding and Consumption Volatility," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 771-792, August.
  4. Orazio P. Attanasio & Hamish Low, 2000. "Estimating Euler Equations," NBER Technical Working Papers 0253, National Bureau of Economic Research, Inc.
  5. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  7. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
  8. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," Working Papers wp173, University of Michigan, Michigan Retirement Research Center.
  9. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  10. Arthur Lewbel, 2000. "Identification of the Binary Choice Model with Misclassification," Boston College Working Papers in Economics 457, Boston College Department of Economics.
  11. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  12. Daniel, Kent & Marshall, David, 1997. "Equity-Premium And Risk-Free-Rate Puzzles At Long Horizons," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 452-484, June.
  13. Skinner, Jonathan, 1987. "A superior measure of consumption from the panel study of income dynamics," Economics Letters, Elsevier, vol. 23(2), pages 213-216.
  14. Hausman, J. A. & Abrevaya, Jason & Scott-Morton, F. M., 1998. "Misclassification of the dependent variable in a discrete-response setting," Journal of Econometrics, Elsevier, vol. 87(2), pages 239-269, September.
  15. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
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