Risk Aversion and the Elasticity of Intertemporal Substitution among Australian Households

Abstract

This paper explores the degree of risk aversion amonsg Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) Survey. Using households' share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using a CRRA utility function, we estimate the elasticity of intertemporal substitution and infer a coefficient of relative risk aversion of 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy.