Risk aversion among Australian households

This paper explores risk aversion among 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 an Euler equation that adjusts for measurement
error in consumption data, we estimate the coefficient of relative risk aversion in the
CRRA utility function. Point estimates from our preferred non-linear models suggest a
moderate degree of risk aversion for the typical Australian household, with values
ranging from 1.2 to 1.4. These findings can provide guidance for calibrating household
preferences in macroeconomic models of the Australian economy.