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Switching Regression Estimates of EIS for Stockholders and Non-Stockholders

  • Sheng Guo

    ()

    (Department of Economics, Florida International University)

This paper analyzes a panel data set of Panel Study of Income Dynamics (PSID) households and demonstrates that the estimate of EIS (Elasticity of Intertemporal Substitution) for stockholders and non-stockholders is large and di erent between them, based upon the consumption-based capital asset pricing model (CAPM). However, recognizing possible laxities in defining and measuring stockholding status, and hence allowing for possible misclassification error therein, I use the switching regression framework to show the evidence that there is a significant portion of stockholders misclassified as non-stockholders. The correction for this misclassification error results in closer gap of EIS between these two groups. Estimates after the correction are in line with those found in repeated cross-section Consumer Expenditure Survey (CEX) samples, whereas estimates without the correction are not. This illustrates the importance of accounting for misclassification error in such contexts. To some extent this result along with others of this research validates the use of repeated cross-section data in quatitative estimation of CAPM.

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File URL: http://casgroup.fiu.edu/pages/docs/1569/1280267703_09-03.pdf
File Function: First version, 2009
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Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0903.

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Length: 25 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:fiu:wpaper:0903
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Web page: http://casgroup.fiu.edu/Economics/
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  1. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  2. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," NBER Working Papers 13893, National Bureau of Economic Research, Inc.
  3. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
  4. Orazio P. Attanasio & Hamish Low, 2000. "Estimating Euler Equations," NBER Technical Working Papers 0253, National Bureau of Economic Research, Inc.
  5. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  6. Orazio Attanasio & James Banks & Sarah Tanner, 1998. "Asset holding and consumption volatility," IFS Working Papers W98/08, Institute for Fiscal Studies.
  7. Skinner, Jonathan, 1987. "A superior measure of consumption from the panel study of income dynamics," Economics Letters, Elsevier, vol. 23(2), pages 213-216.
  8. Lewbel, Arthur, 2000. "Identification Of The Binary Choice Model With Misclassification," Econometric Theory, Cambridge University Press, vol. 16(04), pages 603-609, August.
  9. Daniel, Kent & Marshall, David, 1997. "Equity-Premium And Risk-Free-Rate Puzzles At Long Horizons," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 452-484, June.
  10. 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.
  11. Orazio P. Attanasio & Monica Paiella, 2007. "Intertemporal Consumption Choices, Transaction Costs and Limited Participation in Financial Markets: Reconciling Data and Theory," Temi di discussione (Economic working papers) 620, Bank of Italy, Economic Research and International Relations Area.
  12. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  13. 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.
  14. Hausman, J. A. & Abrevaya, Jason & Scott-Morton, F. M., 1998. "Misclassification of the dependent variable in a discrete-response setting," Journal of Econometrics, Elsevier, vol. 87(2), pages 239-269, September.
  15. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
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