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Name Juan Du
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Title

Intertemporal Elasticity of Substitution and Risk Aversion: Are they Related Empirically? Applied Economics, 47(15), 1588-1605

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Joint Author

Author

Takeshi Yagihashi, Juan Du

Summary

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.

Magazine(name)

Applied Economics

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Volume

47

Number Of Pages

15

StartingPage

1588

EndingPage

1605

Date of Issue

2015/03

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Language

English

Thesis Type

Research papers (academic journals)

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