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An estimation of economic models with recursive preferences

  • Xiaohong Chen

    ()

    (Institute for Fiscal Studies and Yale University)

  • Jack Favilukis

    (Institute for Fiscal Studies)

  • Sydney Ludvigson

    (Institute for Fiscal Studies)

This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) (EZW) recursive utility model, evaluates the models ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17-60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above one. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the CRSP value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.

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File URL: http://www.cemmap.ac.uk/wps/cwp321212.pdf
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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP32/12.

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Date of creation: Oct 2012
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Handle: RePEc:ifs:cemmap:32/12
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  1. Rui Castro & Claudio Campanale & Gian Luca Clementi, 2007. "Asset Pricing in a General Equilibrium Production Economy with Chew-Dekel Risk Preferences," 2007 Meeting Papers 503, Society for Economic Dynamics.
  2. Mariano M. Croce, 2006. "Welfare Costs, Long Run Consumption Risk, and a Production Economy," 2006 Meeting Papers 582, Society for Economic Dynamics.
  3. Ai, Chunrong & Chen, Xiaohong, 2007. "Estimation of possibly misspecified semiparametric conditional moment restriction models with different conditioning variables," Journal of Econometrics, Elsevier, vol. 141(1), pages 5-43, November.
  4. Orazio Attanasio & James Banks & Sarah Tanner, 1998. "Asset Holding and Consumption Volatility," NBER Working Papers 6567, National Bureau of Economic Research, Inc.
  5. Xiaohong Chen & Oliver Linton & Ingred Van Keilegom, 2002. "Estimation of semiparametric models when the criterion function is not smooth," CeMMAP working papers CWP02/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. Dirk Krueger & Felix Kubler, 2006. "Pareto-Improving Social Security Reform when Financial Markets are Incomplete!?," American Economic Review, American Economic Association, vol. 96(3), pages 737-755, June.
  7. Xavier Gabaix & David Laibson, 2002. "The 6D Bias and the Equity Premium Puzzle," Harvard Institute of Economic Research Working Papers 1947, Harvard - Institute of Economic Research.
  8. Fernando Restoy & Philippe Weil, 2011. "Approximate Equilibrium Asset Prices," Review of Finance, European Finance Association, vol. 15(1), pages 1-28.
  9. Hanno Lustig, . "The Wealth-Consumption Ratio: A Litmus Test for Consumption-based Asset Pricing Models," UCLA Economics Online Papers 420, UCLA Department of Economics.
  10. repec:cep:stiecm:/2003/450 is not listed on IDEAS
  11. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  12. Hansen, Lars Peter & Heaton, John & Lee, Junghoon & Roussanov, Nikolai, 2007. "Intertemporal Substitution and Risk Aversion," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 61 Elsevier.
  13. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 825-853, August.
  14. Attanasio, Orazio P & Weber, Guglielmo, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 631-49, July.
  15. Hanno Lustig & Stijn Van Nieuwerburgh, 2008. "The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2097-2137, September.
  16. Chunrong Ai & Xiaohong Chen, 2003. "Efficient Estimation of Models with Conditional Moment Restrictions Containing Unknown Functions," Econometrica, Econometric Society, vol. 71(6), pages 1795-1843, November.
  17. Riccardo Colacito & Mariano Croce, 2005. "Risks For The Long Run And The Real Exchange Rate," 2005 Meeting Papers 794, Society for Economic Dynamics.
  18. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
  19. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  20. Heaton, John, 1993. "The Interaction between Time-Nonseparable Preferences and Time Aggregation," Econometrica, Econometric Society, vol. 61(2), pages 353-85, March.
  21. Ravi Bansal & Robert Dittmar & Dana Kiku, 2009. "Cointegration and Consumption Risks in Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1343-1375, March.
  22. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  23. Mariano M. Croce & Martin Lettau & Sydney C. Ludvigson, 2007. "Investor Information, Long-Run Risk, and the Term Structure of Equity," NBER Working Papers 12912, National Bureau of Economic Research, Inc.
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