Neely, C.J. (Federal Reserve Bank of St. Louis) Roy, A. (Credit Suisse First Boston, London and Financial Markets Group, LSE, London) Whiteman, C.H. () (University of Iowa)
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Is 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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Paper 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: Handle: RePEc:uia:iowaec:98-08
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
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Find related papers by JEL classification: C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: 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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