Does the degree of relative risk aversion vary with household characteristics

https://www.nber.org/system/files/working_papers/w1468/w1468.pdf

Wealth and portfolio composition: Theory and evidence

Most households persistently invest in riskless assets but not stocks, and may do so because they perceive information required for market participation to be costly relative to expected benefits. In a Consumption Capital Asset Pricing Model (CCAPM) increased risk aversion, income risk, and lower resources reduce the information expense sufficient to deter stockholding. Bivariate probit analysis using the 1983–1989 Survey of Consumer Finances shows that households with lower risk aversion, higher education, and greater wealth who were nonstockholders in 1983 had an increased conditional probability of entering by 1989, whereas 1983 stockholders with lower resources, more limited education, and greater risk aversion were more likely to be nonstockholders by 1989.

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Stockholding Behavior of U.S. Households: Evidence from the 1983–1989 Survey of Consumer Finances

Discrete choice models are commonly used by applied statisticians in numerous fields, such as marketing, economics, finance, and operations research. When agents in discrete choice models are assumed to have differing preferences, exact inference is often intractable. Markov chain Monte Carlo techniques make approximate inference possible, but the computational cost is prohibitive on the large datasets now becoming routinely available. Variational methods provide a deterministic alternative for approximation of the posterior distribution. We derive variational procedures for empirical Bayes and fully Bayesian inference in the mixed multinomial logit model of discrete choice. The algorithms require only that we solve a sequence of unconstrained optimization problems, which are shown to be convex. One version of the procedures relies on a new approximation to the variational objective function, based on the multivariate delta method. Extensive simulations, along with an analysis of real-world data, demonstr...

Variational Inference for Large-Scale Models of Discrete Choice

We argue that the relevant monetary decision for the majority of U.S. households is not the fraction of assets to be held in interest-bearing form, but whether to hold any such assets at all (we call this "the decision to adopt" the financial technology). We show that the key variable governing the adoption decision is the product of the interest rate times the total amount of assets. This implies that the interest elasticityof household money demand at low interest rates can be estimated from the variation in asset holdings in a cross section of households rather than historical interest rate variations. We do so with the 1989 Survey of Consumer Finances. We find that (a) the elasticity of money demand is very small when the interest rate is small, (b) the probability that a household holds any amount of interest-bearing assets is positively related to the level of financial assets, and (c) the cost of adopting financial technologies is negatively related to participation in a pension program. The finding that the elasticity is very small for interest rates below 5 percent suggests that the welfare costs of inflation are small. At interest rates of 5 percent, roughly one-half of the elasticity can be attributed to the Baumol-Tobin or intensive margin and half to the new adopters or extensive margin. The intensive margin is less important at lower interest rates and more important at higher interest rates. Finally, we argue that ignoring extensive margins may lead to an empirically important over estimation of the cost of inflation at low interest rates.

J. G. Cragg

Papers

The Structure of the Asset Portfolios of Households