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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

An Empirical Test of Arrow Hypothesis validity by Household Portfolio Choices

Vol.18, No.3, September , 1–31


English Version |  Korean Version
  •   (School of Economics, Yonsei University)

  •   (Department of Economics, Pusan National University)

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Abstract  

Arrow (1965) has argued that absolute risk aversion decreases as wealth increases (DARA) and relative risk aversion increases as wealth increases (IRRA). Most of economists agree that absolute risk aversion decreases as wealth increases, but there is no such consensus for relative risk aversion. The goal of this paper is to assess the validity of Arrow hypothesis by household portfolio choice using Household Consumption Survey Data released from Korea National Statistical Office in 2000. We find that relative risk aversion tends to decrease as wealth increases. This finding is robust across measures of risky assets, methods of inference and type of samples.


Keywords
   Arrow hypothesis, IRRA, DRRA, Tobit, LAD

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