In this paper we investigate the empirical relevance of two theoretical issues concerning life cycle consumer optimizing behaviour: the possibility of disentangling the concepts of risk aversion and intertemporal substitution, and the plausibility of the assumptions needed for the dynastic view of intertemporal maximization to be correct.
We use Selden's Ordinal Certainty Equivalence approach to separately identify the coefficient of relative risk aversion and the elasticity of intertemporal substitution and jointly estimate a consumption growth and two asset return Euler equations. We alternatively use aggregate data and average cohort data to assess the importance of aggregation bias. Finally, we provide an alternative interpretation of our results in the light of Kreps and Porteus (1978) analysis of behaviour under uncertainty.
Our empirical results suggest that both elasticity of intertemporal substitution and coefficient of risk aversion are higher than usually found in the traditional Expected Utility framework, and that aggregation bias leads to unwarranted rejections of theoretical restrictions.
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