ICEF/LFE Research Seminar by Francisco Gomes (LBS)
Speaker: Francisco Gomes (LBS)
Theme: "The Cross-Section of Household Preferences" joint with Laurent Calvet, John Campbell and Paolo Sodini
Abstract: This paper estimates the cross-sectional distribution of preferences in a large administrative panel of Swedish households. We consider a life-cycle portfolio choice model, which incorporates risky labor income, safe and risky financial assets inside and outside retirement accounts, and real estate. We study middle-aged households grouped by education, industry of employment, and birth cohort as well as by their accumulated wealth and risky portfolio shares. Our model allows for heterogeneity in risk aversion, the elasticity of intertemporal substitution (EIS), and the rate of time preference. The average values of these parameters are reasonable at 5.8, 1.2, and 4.1% respectively but there is a great deal of cross-sectional variation around these averages, particularly in the EIS and the rate of time preference. Key cross-sectional patterns are negative correlations between initial wealth and both time preference and risk aversion, a negative correlation between time preference and risk aversion, a positive correlation between time preference and the EIS, a weaker negative correlation between risk aversion and the EIS, and a negative correlation between income risk and risk aversion.