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An Estimation of Economic Models with Recursive Preferences

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  • Xiaohong Chen
  • Jack Favilukis
  • Sydney C. Ludvigson

Abstract

This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) (EZW) recursive utility model, evaluates the model's ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17-60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above one. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the CRSP value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17130.

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Date of creation: Jun 2011
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Publication status: published as “An Estimation of Recursive Preferences,” (with Jack Favilukis and Xiaohong Chen), in Quantitative Economics (forthcoming).
Handle: RePEc:nbr:nberwo:17130

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  1. Ai, Chunrong & Chen, Xiaohong, 2007. "Estimation of possibly misspecified semiparametric conditional moment restriction models with different conditioning variables," Journal of Econometrics, Elsevier, Elsevier, vol. 141(1), pages 5-43, November.
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  1. About very large risk aversion estimates
    by Economic Logician in Economic Logic on 2011-08-05 14:59:00
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Cited by:
  1. Schneider, Maik T. & Traeger, Christian P. & Winkler, Ralph, 2012. "Trading off generations: Equity, discounting, and climate change," European Economic Review, Elsevier, Elsevier, vol. 56(8), pages 1621-1644.

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