Censored Fractional Response Model : Estimating Heterogeneous Relative Risk Aversion of European Households

This paper estimates relative risk aversion using the observed share of risky assets and characteristics of households. By assuming a participation cost of risky asset market and treating zero risky shares as a result of heterogeneous self-censoring, I estimate relative risk aversion and participation cost using a working sample with both participants and non-participants. This paper proposes a censored fractional response model to address the fact that risky share is a fractional response variable belonging to unity interval, and uses extremal quantile regression to estimate censoring thresholds. Empirical results show that the representative relative risk aversion is 30% to 70% higher than previously empirical evidence. The median relative risk aversion of eight Euro-zone countries range from 4.6 to 13.6, suggesting high international heterogeneity