Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/117343
Authors: 
Xiong, Qizhou
Year of Publication: 
2015
Series/Report no.: 
IWH Discussion Papers 11/2015
Abstract: 
This paper estimates relative risk aversion using the observed shares of risky assets and characteristics of households from the Household Finance and Consumption Survey of the European Central Bank. Given that the risky share is a fractional response variable belonging to [0, 1], this paper proposes a censored fractional response estimation method using extremal quantiles to approximate the censoring thresholds. Considering that participation in risky asset markets is costly, I estimate both the heterogeneous relative risk aversion and participation cost using a working sample that includes both risky asset holders and non-risky asset holders by treating the zero risky share as the result of heterogeneous self-censoring. Estimation results show lower participation costs and higher relative risk aversion than what was previously estimated. The estimated median relative risk aversions of eight European countries range from 4.6 to 13.6. However, the results are sensitive to households' perception of the risky asset market return and volatility.
Subjects: 
European household finance
relative risk aversion
censored fractional response model
extremal quantile regression
JEL: 
C21
C24
E44
G11
Document Type: 
Working Paper

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