Does Relative Risk Aversion Vary with Wealth? Evidence from Households' Portfolio Choice Data

41 Pages Posted: 4 Apr 2012 Last revised: 11 Feb 2016

See all articles by Xuan Liu

Xuan Liu

East Carolina University - Department of Economics

Fang Yang

Louisiana State University, Baton Rouge

Zongwu Cai

University of North Carolina at Charlotte

Date Written: February 10, 2016

Abstract

We test whether relative risk aversion varies with wealth using the Panel Study of Income Dynamics data in the U.S. Our analytical results indicate the following implications. For each household, there are two channels through which the risky share responds to wealth fluctuations, the income channel and the habit channel. For across households, there are heterogeneous responses through both the habit channel and the income channel. Finally, two potential misspecification problems on time-varying relative risk aversion arise when both heterogeneous responses through the habit channel and the responses through the income channel are ignored. Our main empirical findings are to show the importance of the income channel and the heterogeneous responses, and to provide strong evidence of relative risk aversion varying with wealth, after correcting two misspecification problems.

Keywords: time-varying relative risk aversion, habit formation preferences, micro data, portfolio choice

JEL Classification: E21, E24, D91

Suggested Citation

Liu, Xuan and Yang, Fang and Cai, Zongwu, Does Relative Risk Aversion Vary with Wealth? Evidence from Households' Portfolio Choice Data (February 10, 2016). Available at SSRN: https://ssrn.com/abstract=2033427 or http://dx.doi.org/10.2139/ssrn.2033427

Xuan Liu

East Carolina University - Department of Economics ( email )

Brewster Building
Greenville, NC 27858
United States

Fang Yang

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

HOME PAGE: http://faculty.bus.lsu.edu/fyang/

Zongwu Cai (Contact Author)

University of North Carolina at Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States
704-687-2650 (Phone)

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