Risk aversion among Australian households

Robert Breunig and Owen Freestone ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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 (search for similar items in EconPapers)
JEL-codes: D12 D15 E21 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2019-03
New Economics Papers: this item is included in nep-mac, nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2019-27

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