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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society

#### An Empirical Test of Arrow Hypothesis validity by Household Portfolio ChoicesVol.18, No.3, September 2007, 1–31

English Version |  Korean Version

• #### Jin-Suk Choi   (Department of Economics, Pusan National University)

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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