Risk Aversion vs. Intertemporal Substitution: Identification Failure in the Intertemporal Consumption CAPM
AbstractIs the risk aversion parameter in the simple intertemporal consumption CAPM "small" as in Hansen and Singleton (1982,1983), or is it that its reciprocal, the intertemporal elasticity of substitution, is small, as in Hall (1988)? This paper attributes the disparate estimates of this fundamental parameter not only to failures of instrument admissibility as do Hall (1988) and Hansen-Singleton (1996), but rather to failures of instrument relevance. That is, the disparate estimates reflect near nonidentification due to the unpredictability of asset returns and consumption growth. One natural identifying restriction from the risk aversion perspective leads to estimates that are low and stable over both time and model specifications. An equally natural identifying restriction from the intertemporal substitution perspective leads to estimates of the reciprocal that are also low and stable.
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Bibliographic InfoPaper provided by University of Iowa, Department of Economics in its series Working Papers with number 98-08.
Length: 22 Pages
Date of creation: Aug 1998
Date of revision:
Contact details of provider:
Postal: University of Iowa, Department of Economics, Henry B. Tippie College of Business, Iowa City, Iowa 52242
Phone: (319) 335-0829
Fax: (319) 335-1956
Web page: http://tippie.uiowa.edu/economics/
More information through EDIRC
Consumption-based asset pricing; Asset pricing; Time Series; Maximum Likelihood Estimation;
Other versions of this item:
- Chris Neely & Amlan Roy & Charles Whiteman, 1999. "Risk aversion vs. intertemporal substitution: identification failure in the intertemporal consumption CAPM," Working Papers 1995-002, Federal Reserve Bank of St. Louis.
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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