Defying the conventional wisdom: US consumers are found to be more risk averse than those of Japan

Abstract

This paper derives and estimates first order (Euler) equations for joint consumption and asset demand decisions. It uses standard, intertemporally separable, preferences and also Kreps-Porteus aggregator functions. The focus of the paper is on a comparison of USA and Japan. For this purpose, it envisages an integrated world capital market in which consumers in each country can invest freely in both countries' assets. The main result is that the parameter estimates suggest higher risk aversion rates for USA than for Japanese consumers. Also, the empirical results show that introducing this heterogeneity in the Kreps-Porteus preference model significantly improves the goodness-of-fit of the model.