An estimation of economic models with recursive preferences

Xiaohong Chen, Jack Favilukis, Sydney Ludvigson

    Research output: Contribution to journalArticle

    Abstract

    This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility model, evaluates the model's 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 to 60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above 1. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the Center for Research in Security Prices value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.

    Original languageEnglish (US)
    Pages (from-to)39-83
    Number of pages45
    JournalQuantitative Economics
    Volume4
    Issue number1
    DOIs
    StatePublished - Mar 2013

    Fingerprint

    Recursive preferences
    Wealth
    Stock market returns
    Asset returns
    Asset pricing models
    Stockholders
    Security price
    Empirical results
    Relative risk aversion
    Elasticity of intertemporal substitution
    Recursive utility
    Aggregate consumption

    Keywords

    • Consumption based asset pricing
    • Limited stock market participation
    • Semiparametric estimation

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    An estimation of economic models with recursive preferences. / Chen, Xiaohong; Favilukis, Jack; Ludvigson, Sydney.

    In: Quantitative Economics, Vol. 4, No. 1, 03.2013, p. 39-83.

    Research output: Contribution to journalArticle

    Chen, X, Favilukis, J & Ludvigson, S 2013, 'An estimation of economic models with recursive preferences', Quantitative Economics, vol. 4, no. 1, pp. 39-83. https://doi.org/10.3982/QE97
    Chen, Xiaohong ; Favilukis, Jack ; Ludvigson, Sydney. / An estimation of economic models with recursive preferences. In: Quantitative Economics. 2013 ; Vol. 4, No. 1. pp. 39-83.
    @article{5213a3ee91b94a5196d25a0315fc3b9b,
    title = "An estimation of economic models with recursive preferences",
    abstract = "This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility model, evaluates the model's 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 to 60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above 1. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the Center for Research in Security Prices value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.",
    keywords = "Consumption based asset pricing, Limited stock market participation, Semiparametric estimation",
    author = "Xiaohong Chen and Jack Favilukis and Sydney Ludvigson",
    year = "2013",
    month = "3",
    doi = "10.3982/QE97",
    language = "English (US)",
    volume = "4",
    pages = "39--83",
    journal = "Quantitative Economics",
    issn = "1759-7323",
    publisher = "The Economic Society",
    number = "1",

    }

    TY - JOUR

    T1 - An estimation of economic models with recursive preferences

    AU - Chen, Xiaohong

    AU - Favilukis, Jack

    AU - Ludvigson, Sydney

    PY - 2013/3

    Y1 - 2013/3

    N2 - This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility model, evaluates the model's 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 to 60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above 1. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the Center for Research in Security Prices value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.

    AB - This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility model, evaluates the model's 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 to 60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above 1. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the Center for Research in Security Prices value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.

    KW - Consumption based asset pricing

    KW - Limited stock market participation

    KW - Semiparametric estimation

    UR - http://www.scopus.com/inward/record.url?scp=84883342384&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=84883342384&partnerID=8YFLogxK

    U2 - 10.3982/QE97

    DO - 10.3982/QE97

    M3 - Article

    AN - SCOPUS:84883342384

    VL - 4

    SP - 39

    EP - 83

    JO - Quantitative Economics

    JF - Quantitative Economics

    SN - 1759-7323

    IS - 1

    ER -