Censored Fractional Response Model: Estimating Heterogeneous Relative Risk Aversion of European Households

63 Pages Posted: 22 May 2017

See all articles by Qizhou Xiong

Qizhou Xiong

Said Business School, University of Oxford

Date Written: May 1, 2017

Abstract

This paper estimates relative risk aversion using the observed share of risky assets and characteristics of households. By assuming a participation cost of risky asset market and treating zero risky shares as a result of heterogeneous self-censoring, I estimate relative risk aversion and participation cost using a working sample with both participants and non-participants. This paper proposes a censored fractional response model to address the fact that risky share is a fractional response variable belonging to unity interval, and uses extremal quantile regression to estimate censoring thresholds. Empirical results show that the representative relative risk aversion is 30% to 70% higher than previously empirical evidence. The median relative risk aversion of eight Euro-zone countries range from 4.6 to 13.6, suggesting high international heterogeneity.

Keywords: Relative Risk Aversion, Censored Fractional Response Model, Household Finance

JEL Classification: C21, C24, E44, G11

Suggested Citation

Xiong, Qizhou, Censored Fractional Response Model: Estimating Heterogeneous Relative Risk Aversion of European Households (May 1, 2017). Available at SSRN: https://ssrn.com/abstract=2972016 or http://dx.doi.org/10.2139/ssrn.2972016

Qizhou Xiong (Contact Author)

Said Business School, University of Oxford ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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