A dynamic quantile model for distinguishing intertemporal substitution from risk aversion

Luciano de Castro; Lance D. Cundy; Antonio F. Galvao; Rafael Westenberger

doi:10.1016/j.euroecorev.2023.104587

Back

A dynamic quantile model for distinguishing intertemporal substitution from risk aversion

Journal article

Peer reviewed

A dynamic quantile model for distinguishing intertemporal substitution from risk aversion

Luciano de Castro, Lance D. Cundy, Antonio F. Galvao and Rafael Westenberger

European economic review, Vol.159, 104587

10/2023

DOI: 10.1016/j.euroecorev.2023.104587

View Online

Abstract

This paper uses a dynamic quantile model to estimate the elasticity of intertemporal substitution (EIS) and risk attitude using large disaggregated data from the NielsenIQ Consumer Panel. This data is transactional at the consumption purchase level, which minimizes measurement error, and the final sample contains more than two million observations. In the quantile model, the risk attitude is captured by the quantile and is, therefore, separable from the EIS. To estimate the parameters of interest we use the Euler equation along with instrumental variables quantile regression. First, we estimate the model across different levels of risk attitude. Empirical results document evidence of monotonically decreasing EIS along quantiles. For large risk aversion, the EIS is greater than one, whereas for small risk aversion it descends into negative values. Subsequently, we estimate the risk attitude and the EIS simultaneously. The results substantiate a risk attitude close to the median, with EIS consistently positive and smaller than one.

Consumption

EIS

Quantile preferences

Risk attitude

Details

Title: Subtitle: A dynamic quantile model for distinguishing intertemporal substitution from risk aversion
Creators: Luciano de Castro - University of Iowa
Lance D. Cundy - Federal Reserve Bank of Minneapolis
Antonio F. Galvao - Michigan State University
Rafael Westenberger - Deutsches Zentrum für Luft- und Raumfahrt e. V. (DLR)
Resource Type: Journal article
Publication Details: European economic review, Vol.159, 104587
DOI: 10.1016/j.euroecorev.2023.104587
ISSN: 0014-2921
eISSN: 1873-572X
Publisher: Elsevier B.V
Grant note: DOI: 10.13039/501100003593, name: Conselho Nacional de Desenvolvimento Científico e Tecnológico
Language: English
Electronic publication date: 09/2023
Date published: 10/2023
Academic Unit: Economics
Record Identifier: 9984472508702771

Metrics

18 Record Views

1 Times Cited - Web of Science