Estimating Nonseparable Preference Specifications for Asset Market Participants

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.
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