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Risk Aversion vs. Intertemporal Substitution: Identification Failure in the Intertemporal Consumption CAPM

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Neely, C.J. & Roy, A. & Whiteman, C.H., 1998. "Risk Aversion vs. Intertemporal Substitution: Identification Failure in the Intertemporal Consumption CAPM," Working Papers 98-08, University of Iowa, Department of Economics.
    • Handle: RePEc:uia:iowaec:98-08
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    Cited by:

    1. is not listed on IDEAS
    2. Michael Nwogugu, 2020. "Regret Theory And Asset Pricing Anomalies In Incomplete Markets With Dynamic Un-Aggregated Preferences," Papers 2005.01709, arXiv.org.

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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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