An Estimation of Economic Models with Recursive Preferences

59 Pages Posted: 15 Dec 2012

See all articles by Xiaohong Chen

Xiaohong Chen

Yale University - Cowles Foundation

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Sydney C. Ludvigson

New York University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 4 versions of this paper

Date Written: December 13, 2012

Abstract

This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) (EZW) 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 17-60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above one. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the CRSP value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.

JEL Classification: G12, E21

Suggested Citation

Chen, Xiaohong and Favilukis, Jack Y and Ludvigson, Sydney C., An Estimation of Economic Models with Recursive Preferences (December 13, 2012). Cowles Foundation Discussion Paper No. 1883, Available at SSRN: https://ssrn.com/abstract=2188924 or http://dx.doi.org/10.2139/ssrn.2188924

Xiaohong Chen (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Sydney C. Ludvigson

New York University - Department of Economics ( email )

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New York, NY 10012
United States
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212-995-4186 (Fax)

HOME PAGE: http://www.econ.nyu.edu/user/ludvigsons/

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