Document Type

Article

Publication Date

2015

DOI

10.1080/00036846.2014.1000530

Publication Title

Applied Economics

Volume

47

Issue

15

Pages

1588-1605

Abstract

This article examines the relationship between two types of preference: preference of intertemporal choices and preference towards risk. In the simplest form of the constant relative risk aversion utility function, the intertemporal elasticity of substitution (IES) and risk aversion have an inverse relationship. However, there is no empirical evidence that suggests this inverse relationship holds. We examine the relationship between risk aversion and IES using household consumption data from the Consumer Expenditure Survey during 1996–2010. Multiple risk domains are selected to represent risk preference, and for each domain, we consider some households to be more risk averse than others. We separately estimate IES for the more risk-averse and less risk-averse households. We find that the IES estimates are generally smaller for the more risk-averse households than for the less risk-averse households and that the difference is statistically significant in the majority of the financial domains. This finding supports the inverse relationship between the two parameters, although considerable heterogeneity is found across domains.

Comments

NOTE: This is a pre-print of an article published by Taylor & Francis in Applied Economics on January 14, 2015:

Yagihashi, T., & Du, J. (2015). Intertemporal elasticity of substitution and risk aversion: are they related empirically? Applied Economics, 47(15), 1588-1605. doi: 10.1080/00036846.2014.1000530

Available online at:

http://www.tandfonline.com/doi/abs/10.1080/00036846.2014.1000530

ORCID

0000-0001-9916-6008 (Takeshi Yagihashi), 0000-0001-8611-1577 (Juan Du)

Original Publication Citation

Yagihashi, T., & Du, J. (2015). Intertemporal elasticity of substitution and risk aversion: are they related empirically? Applied Economics, 47(15), 1588-1605. doi: 10.1080/00036846.2014.1000530

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