 Time-varying relative risk aversion: Theoretical mechanism and empirical evidenceXuan Liu, Haiyong Liu and Zongwu Cai Journal of Empirical Finance, 2024, vol. 78, issue C Abstract: This paper explores the issue of understanding time-varying relative risk aversion with household-level data on two classical portfolio choice problems. First, we derive an analytic form solution to a parsimonious portfolio choice model with the preference given by Greenwood, Hercowitz and Huffman (1988, GHH), and then, the solution identifies four partial equilibrium effects in our model with the GHH preference on risky shares through two channels and two net effects whose signs hinge on the value of a key structural parameter. Based on household-level data, our empirical results from both mean and quantile regression models show clearly that wealth negatively affects risky shares and the estimated effects are statistically significant and robust, which is in line with the theory. Finally, we show that the GHH preference alone is not sufficient in explaining how risky shares respond to labor income in the household-level data. Keywords: Time-varying relative risk aversion; Household-level data; Portfolio choice; GHH preference; Risky shares; Wealth; Labor income (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:78:y:2024:i:c:s0927539824000707 DOI: 10.1016/j.jempfin.2024.101535 Access Statistics for this article Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff More articles in Journal of Empirical Finance from Elsevier |
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