Risk Aversion Among Australian Households

47 Pages Posted: 25 Mar 2019

See all articles by Robert V. Breunig

Robert V. Breunig

Australian National University (ANU) - Crawford School of Public Policy

Owen Freestone

Australian National University (ANU)

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2019

Abstract

This paper explores risk aversion among Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) survey. Using households’ share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using an Euler equation that adjusts for measurement error in consumption data, we estimate the coefficient of relative risk aversion in the CRRA utility function. Point estimates from our preferred non-linear models suggest a moderate degree of risk aversion for the typical Australian household, with values ranging from 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy.

Keywords: risk aversion, intertemporal consumption choice, Euler equation, measurement error, GMM, instrumental variables

JEL Classification: D12, D15, E21

Suggested Citation

Breunig, Robert V. and Freestone, Owen, Risk Aversion Among Australian Households (March 25, 2019). CAMA Working Paper No. 27/2019. Available at SSRN: https://ssrn.com/abstract=3359344 or http://dx.doi.org/10.2139/ssrn.3359344

Robert V. Breunig (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia
61261252148 (Phone)

HOME PAGE: http://https://crawford.anu.edu.au/crawford_people/content/staff/rbreunig.php

Owen Freestone

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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