Risk aversion vs. intertemporal substitution: identification failure in the intertemporal consumption CAPM
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.
|Date of creation:||1999|
|Date of revision:|
|Publication status:||Published in Journal of Business and Economic Statistics, October 2001, 19(4), pp. 395-403|
|Contact details of provider:|| Postal: P.O. Box 442, St. Louis, MO 63166|
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Prescott, Edward C., 1986.
"Theory ahead of business-cycle measurement,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 25(1), pages 11-44, January.
- 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.
- Wheatley, Simon, 1988. "Some tests of the consumption-based asset pricing model," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 193-215, September.
- Breeden, Douglas T & Gibbons, Michael R & Litzenberger, Robert H, 1989. " Empirical Tests of the Consumption-Oriented CAPM," Journal of Finance, American Finance Association, vol. 44(2), pages 231-62, June.
- Heaton, John & Lucas, Deborah J, 1996.
"Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing,"
Journal of Political Economy,
University of Chicago Press, vol. 104(3), pages 443-87, June.
- John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
- 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.
- Wayne E. Ferson & George M. Constantinides, 1991.
"Habit Persistence and Durability in Aggregate Consumption: Empirical Tests,"
NBER Working Papers
3631, National Bureau of Economic Research, Inc.
- Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
- Braun, Phillip A. & Constantinides, George M. & Ferson, Wayne E., 1993.
"Time nonseparability in aggregate consumption : International evidence,"
European Economic Review,
Elsevier, vol. 37(5), pages 897-920, June.
- Phillip A. Braun & George M. Constantinides & Wayne E. Ferson, 1992. "Time Nonseparability in Aggregate Consumption: International Evidence," NBER Working Papers 4104, National Bureau of Economic Research, Inc.
- Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-67, November.
- Heaton, John, 1993. "The Interaction between Time-Nonseparable Preferences and Time Aggregation," Econometrica, Econometric Society, vol. 61(2), pages 353-85, March.
- Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
- Lars Peter Hansen & Kenneth J. Singleton, 1997.
"Efficient Estimation of Linear Asset Pricing Models with Moving-Average Errors,"
NBER Technical Working Papers
0086, National Bureau of Economic Research, Inc.
- Hansen, Lars Peter & Singleton, Kenneth J, 1996. "Efficient Estimation of Linear Asset-Pricing Models with Moving Average Errors," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 53-68, January.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:1995-002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.