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Working Paper
Risk aversion vs. intertemporal substitution: identification failure in the intertemporal consumption CAPM
Is the risk aversion parameter in the simple intertemporal consumption CAPM ?small? as in Hansen and Singleton (1982,1983), or is it that its reciprocal, the intertemporal elasticity of substitution, is small, as in Hall (1988)? This paper attributes the disparate estimates of this fundamental parameter not only to failures of instrument admissibility as do Hall (1988) and Hansen-Singleton (1996), but rather to failures of instrument relevance. That is, the disparate estimates reflect near nonidentification due to the unpredictability of asset returns and consumption growth. One natural ...