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Risk Aversion and the Elasticity of Intertemporal Substitution among Australian Households
Author(s) -
Freestone Owen,
Breunig Robert
Publication year - 2020
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/1475-4932.12538
Subject(s) - economics , risk aversion (psychology) , elasticity of substitution , econometrics , substitution (logic) , elasticity of intertemporal substitution , panel data , panel study of income dynamics , substitution effect , income elasticity of demand , microeconomics , expected utility hypothesis , financial economics , labour economics , growth model , production (economics) , computer science , programming language
This paper explores the degree of risk aversion amonsg Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) Survey. Using households' share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using a CRRA utility function, we estimate the elasticity of intertemporal substitution and infer a coefficient of relative risk aversion of 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy.