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Approximation bias in estimating risk aversion

Author

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  • Joseph G. Eisenhauer

    () (Canisius College)

Abstract

The asymmetric approximation originally employed by Pratt (1964) to construct reduced-form measures of risk aversion s a downward bias when used for empirical estimation. Calculations based on recent survey data indicate that estimates from a symmetric approximation are generally three times larger than their asymmetric counterparts, a finding that may help to explain the equity premium puzzle.

Suggested Citation

  • Joseph G. Eisenhauer, 2003. "Approximation bias in estimating risk aversion," Economics Bulletin, AccessEcon, vol. 4(38), pages 1-10.
  • Handle: RePEc:ebl:ecbull:eb-03d80014
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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Merrigan, Philip & Normandin, Michel, 1996. "Precautionary Saving Motives: An Assessment from UK Time Series of Cross-Sections," Economic Journal, Royal Economic Society, vol. 106(438), pages 1193-1208, September.
    3. Hlawitschka, Walter, 1994. "The Empirical Nature of Taylor-Series Approximations to Expected Utility," American Economic Review, American Economic Association, vol. 84(3), pages 713-719, June.
    4. Warneryd, Karl-Erik, 1996. "Risk attitudes and risky behavior," Journal of Economic Psychology, Elsevier, vol. 17(6), pages 749-770, December.
    5. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
    6. Jean-Jacques Laffont, 1989. "The Economics of Uncertainty and Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121360, January.
    7. Hartog, Joop & Ferrer-i-Carbonell, Ada & Jonker, Nicole, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Wiley Blackwell, vol. 55(1), pages 3-26.
    8. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
    9. Donkers, Bas & Melenberg, Bertrand & Van Soest, Arthur, 2001. "Estimating Risk Attitudes Using Lotteries: A Large Sample Approach," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 165-195, March.
    10. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-1113, December.
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    Cited by:

    1. Peter J. Barry & Bruce J. Sherrick & Jianmei Zhao, 2009. "Integration of VaR and expected utility under departures from normality," Agricultural Economics, International Association of Agricultural Economists, vol. 40(6), pages 691-699, November.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G0 - Financial Economics - - General

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