Option Implied Risk Aversion and Elasticity of Intertemporal Substitution

2008 ◽  
Author(s):  
Douglas W. Blackburn
Keyword(s):  
Risk Aversion ◽  
Intertemporal Substitution ◽  
Elasticity Of Intertemporal Substitution

scholarly journals The Nexus Between the Elasticity of Intertemporal Substitution and the Coefficient of Relative Risk Aversion

2018 ◽  
Vol 9 (3) ◽  
pp. 98
Author(s):  
Samih Antoine Azar
Keyword(s):  
Statistical Analysis ◽  
Relative Risk ◽  
Risk Aversion ◽  
Euler Equation ◽  
Multiple Solutions ◽  
Preference Function ◽  
Relative Risk Aversion ◽  
Intertemporal Substitution ◽  
Three Solutions ◽  
Elasticity Of Intertemporal Substitution

One advantage of the Epstein-Zin preference function is that it disentangles the elasticity of intertemporal substitution (EIS) from the coefficient of relative risk aversion (CRRA). The paper subjects this preference function to statistical analysis. The methodology is to calculate the unconditional average of this new Euler equation and to find out if such an average is statistically insignificantly different from zero. Seventeen individual and different stocks are used. The results show that, when the EIS is fixed, the CRRA has multiple solutions. In some cases there are three solutions and not only two. Moreover these solutions extend to wide ranges.

Eliciting Risk Preferences and Elasticity of Substitution

2020 ◽  
Vol 17 (4) ◽  
pp. 314-329
Author(s):  
Johan Burgaard ◽  
Mogens Steffensen
Keyword(s):  
Risk Aversion ◽  
Discount Rate ◽  
Predictive Power ◽  
Recursive Utility ◽  
Risk Averse ◽  
Indirect Utility ◽  
Consistent Estimation ◽  
On Certainty ◽  
Certainty Equivalents ◽  
Elasticity Of Intertemporal Substitution

Risk aversion and elasticity of intertemporal substitution (EIS) are separated via the celebrated recursive utility building on certainty equivalents of indirect utility. Based on an alternative separation method, we formulate a questionnaire for simultaneous and consistent estimation of risk aversion, subjective discount rate, and EIS. From a representative group of 1,153 respondents, we estimate parameters for these preferences and their variability within the population. Risk aversion and the subjective discount rate are found to be in the orders of 2 and 0, respectively, not diverging far away from results from other studies. Our estimate of EIS in the order of 10 is larger than often reported. Background variables like age and income have little predictive power for the three estimates. Only gender has a significant influence on risk aversion in the usually perceived direction that females are more risk-averse than males. Using individual estimates of preference parameters, we find covariance between preferences toward risk and EIS. We present the background reasoning on objectives, the questionnaire, a statistical analysis of the results, and economic interpretations of these, including relations to the literature.

Disentangling Intertemporal Substitution and Risk Aversion Under the Expected Utility Theorem

2018 ◽  
Vol 19 (2) ◽  
Author(s):  
C. Oscar Lau
Keyword(s):  
Risk Aversion ◽  
Expected Utility ◽  
Axiomatic Approach ◽  
Intertemporal Substitution ◽  
Standard Time ◽  
Separable Form ◽  
Straightforward Extension

Abstract This paper presents an axiomatic approach to separately control for the attitudes toward intertemporal substitution and risk aversion under the expected utility theorem. The standard time-separable form is recovered only if the functions dictating the two attitudes are identical. Risk aversion is defined on consumption amount rather than on utility (as in Kihlstrom and Mirman (1974 and 1981)). Moreover, the agent is allowed to trade his lottery outcome to optimize his consumption. As a result, this approach provides a straightforward extension of the familiar Arrow-Pratt results to multiple periods. These include categorizing, measuring, and comparing risk aversions.

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