Estimating Relative Risk Aversion, the Discount Rate, and the Intertemporal Elasticity of Substitution in Consumption for Brazil Using Three Types of Utility Function

Abstract

Using the generalized method of moments, we estimate structural parameters related to relative-risk aversion, the discount rate of future utility, and the intertemporal elasticity of substitution in consumption for the Brazilian economy. Estimates are provided for three types of utility function based on the consumption capital asset pricing model: constant relative risk aversion utility, utility with external habit, and Kreps-Porteus utility. These results are analyzed and then compared to previous results using Brazilian and U.S. data. Moreover, we perform over-identifying restrictions tests of all estimated models to investigate the possible existence of the equity premium puzzle in Brazil. The overall results show that Brazilian consumers have a relatively high discount rate, a low intertemporal elasticity of substitution, and a high relative risk aversion coefficient. Also, there is no evidence of the existence of the equity premium puzzle in Brazil.