The Cross-Section of Household Preferences

116 Pages Posted: 5 May 2021 Last revised: 23 Jun 2021

See all articles by Laurent E. Calvet

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

John Y. Campbell

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

Francisco Gomes

London Business School

Paolo Sodini

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: April 30, 2021

Abstract

This paper estimates the cross-sectional distribution of Epstein-Zin preference parameters in a Large administrative panel of Swedish households. We consider a life-cycle model of saving and portfolio choice that incorporates risky labor income, safe and risky financial assets inside and outside retirement accounts, and real estate. We study middle-aged stockowning households grouped by education, industry of employment, and birth cohort as well as by their accumulated wealth and risky portfolio shares. We find some heterogeneity in risk aversion (a standard deviation of 0.47 around a mean of 5.24 and median of 5.30) and considerable heterogeneity in the time preference rate (standard deviation 6.0% around a mean of 6.2% and median of 4.1%) and elasticity of intertemporal substitution (standard deviation 0.96 around a mean of 0.99 and median of 0.42). Risk aversion and the EIS are almost cross-sectionally uncorrelated, in contrast with the strong negative correlation that we would find if households had power utility with heterogeneous risk aversion. The TPR is weakly negatively correlated with both the other parameters. We estimate lower risk aversion for households with riskier labor income and higher levels of education, and a higher TPR and lower EIS for households who enter our sample with low initial wealth.

Keywords: Life-cycle model, elasticity of intertemporal substitution, risk aversion, time preference rate, Epstein-Zin preferences, indirect inference

JEL Classification: D14, D91, G11, G51

Suggested Citation

Calvet, Laurent E. and Campbell, John Y. and Gomes, Francisco and Sodini, Paolo, The Cross-Section of Household Preferences (April 30, 2021). Swedish House of Finance Research Paper No. 21-11, Available at SSRN: https://ssrn.com/abstract=3838878 or http://dx.doi.org/10.2139/ssrn.3838878

Laurent E. Calvet (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

John Y. Campbell

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)

HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Francisco Gomes

London Business School ( email )

Finance Department
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/view/francisco-gomes/home

Paolo Sodini

Stockholm School of Economics - Department of Finance ( email )

Sveavagen 65, Box 6501
SE-113 83 Stockholm
Sweden
46 8 7369165 (Phone)
46 8 312327 (Fax)

HOME PAGE: http://www.hhs.se/secfi/People/Faculty/Finpso/finp

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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