Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios
London School of Economics & Political Science (LSE); Columbia Business School - Finance and Economics
London School of Economics & Political Science (LSE)
Columbia Business School - Finance and Economics
January 14, 2013
We estimate risk aversion from investors’ portfolio choices on a person-to-person lending plat- form. Our method obtains a risk aversion parameter from each investment and generates a panel that we use to disentangle the elasticity of risk aversion to wealth from heterogeneity in risk attitudes across investors and changes in beliefs. We find an average income-based Relative Risk Aversion of 2.85, a median of 1.62, and substantial heterogeneity and skewness across investors. Risk aversion increases after a negative housing wealth shock, consistent with Decreasing Relative Risk Aversion. We show that ignoring heterogeneity and changes in beliefs would lead to biased estimates.
Number of Pages in PDF File: 61
Keywords: Risk Aversion, Panel Data, Credit Market
JEL Classification: E21, G11, D12, D14working papers series
Date posted: November 20, 2009 ; Last revised: February 9, 2013
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