Estimating Nonseparable Preference Specifications for Asset Market Participants

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Montréal Février 2001

Série Scientifique

Scientific Series

2001s-12

Estimating Nonseparable

Preference Specifications for

Asset Market Participants

Kris Jacobs

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CIRANO

Le CIRANO est un organisme sans but lucratif constitué en vertu de la Loi des compagnies du Québec. Le financement de son infrastructure et de ses activités de recherche provient des cotisations de ses organisations-membres, d’une subvention d’infrastructure du ministère de la Recherche, de la Science et de la Technologie, de même que des subventions et mandats obtenus par ses équipes de recherche.

CIRANO is a private non-profit organization incorporated under the Québec Companies Act. Its infrastructure and research activities are funded through fees paid by member organizations, an infrastructure grant from the Ministère de la Recherche, de la Science et de la Technologie, and grants and research mandates obtained by its research teams.

Les organisations-partenaires / The Partner Organizations •École des Hautes Études Commerciales

•École Polytechnique •Université Concordia •Université de Montréal

•Université du Québec à Montréal •Université Laval

•Université McGill •MEQ

•MRST

•Alcan Aluminium Ltée •AXA Canada

•Banque du Canada

•Banque Laurentienne du Canada •Banque Nationale du Canada •Banque Royale du Canada •Bell Québec

•Bombardier •Bourse de Montréal

•Développement des ressources humaines Canada (DRHC)

•Fédération des caisses populaires Desjardins de Montréal et de l’Ouest-du-Québec •Hydro-Québec

•Imasco

•Industrie Canada

•Pratt & Whitney Canada Inc. •Raymond Chabot Grant Thornton •Ville de Montréal

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ISSN 1198-8177

Ce document est publié dans l’intention de rendre accessibles les résultats préliminaires de la recherche effectuée au CIRANO, afin de susciter des échanges et des suggestions. Les idées et les opinions émises sont sous l’unique responsabilité des auteurs, et ne représentent pas nécessairement les positions du CIRANO ou de ses partenaires.

This paper presents preliminary research carried out at CIRANO and aims at encouraging discussion and comment. The observations and viewpoints expressed are the sole responsibility of the authors. They do not necessarily represent positions of CIRANO or its partners.

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Estimating Nonseparable Preference Specifications for Asset

Market Participants

*

Kris Jacobs

†

Résumé / Abstract

À l’aide de données de panel et d’équations d’Euler, nous estimons les spécifications de préférence inséparables pour la consommation et les loisirs. L’analyse économétrique fait appel aux données de panel, et diffère en cela des études économétriques existantes qui reposent sur un cadre agent représentatif. De plus, notre analyse porte particulièrement sur les implications non-linéaires de la théorie et par conséquent, elle est différente des études à données de panel existantes qui portent sur les linéarisations. Les équations d’Euler sont estimées pour des échantillons qui incluent uniquement des participants au marché des actions, et aussi pour des échantillons qui incluent des consommateurs qui ne participent pas à ce marché. Il ressort que nous obtenons des estimations intuitivement plausibles seulement lorsqu’on exclue les non-participants de l’échantillon, ce qui montre l’extrême importance de la prise en compte, à la fois de la participation au marché des actions et de l’incomplétude du marché. Pour les participants, les valeurs de paramètre estimées sont totalement différentes de celles des études existantes. Nos résultats ont par conséquent leur place dans une littérature extensive de la macroéconomie et de la finance.

This paper uses panel data and Euler equations to estimate preference specifications that are nonseparable in consumption and leisure. The econometric analysis uses panel data, and therefore it differs from existing econometric studies that use a representative agent framework. Moreover, the analysis focuses on nonlinear implications of the theory and therefore, it is different from existing panel data studies that investigate linearizations. Euler equations are estimated for samples that only include asset market participants, and for samples that also include consumers who do not participate in asset markets. The evidence shows that we obtain intuitively plausible estimates only when excluding non-participants from the sample, indicating that it is critically important to take asset market participation and market incompleteness into consideration. For market participants, estimated parameter values are radically different from existing studies. The findings are therefore of interest for an extensive literature in macroeconomics and finance.

*_{Corresponding Author: Kris Jacobs, Faculty of Management, McGill University, 1001 Sherbrooke Street West,}

Montréal, Qc, Canada H3A 1G5 Tel.: (514) 398-4025 Fax: (514) 398-3876 email: jacobs@management.mcgill.ca The paper has benefited from presentations at the 2000 World Congress of the Econometric Society in Seattle and the 2000 International Conference on Panel Data in Geneva. I would like to thank John Ham for discussions and comments, and FCAR of Québec and SSHRC of Canada for financial support.

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Mots Clés : Incomplétude des marchés, participation au marché des actions, casse-tête de prime de titres, macroéconomie dynamique, inséparabilité, consommation, loisirs, estimation de l’équation d’Euler

Keywords: Market incompleteness, asset market participation, equity premium puzzle, dynamic macroeconomics, nonseparabilities, consumption, leisure, Euler equation estimation

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Estimating Nonseparable Preference Specifications for Asset Market Participants

Série Scientifique

Scientific Series

Estimating Nonseparable

Preference Specifications for

Asset Market Participants

Kris Jacobs

Estimating Nonseparable Preference Specifications for Asset

Market Participants

Kris Jacobs

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