'Censored Fractional Response Regression Model: Estimating Heterogeneous Relative Risk Aversion of European Households

Résumé

This paper attempts to re-estimate relative risk aversion using the observed shares of risky assets and characteristics of households from the Household Finance and Consumption Survey of European Central Bank. Acknowledging participation costs to risky asset markets, I include all types of households simulta- neously by treating the zero or one hundred percent share of risky assets as the results of heterogeneous censoring. Given that risky share is a fractional response variable naturally bounded in [0, 1], this paper proposes a censored fractional re- sponse regression model using extremal quantiles to approximate the censoring thresholds. By using the extremal quantile estimator and a quasi maximum like- lihood estimator, this paper is able to estimate the heterogeneous relative risk aversion and participation cost to risky assets market simultaneously. The estimated median relative risk aversions of eight European countries range from 4.5 to 14.7, which are significantly higher than the previously studies.