Limited Asset Market Participation and the Elasticity of Intertemporal Substitution

The paper presents empirical evidence based on the U.S. Consumer Expenditure Survey that accounting for limited asset market participation is important for estimating the elasticity of intertemporal substitution. Differences in estimates of the EIS between asset holders and non–asset holders are large and statistically significant. This is the case whether estimating the EIS on the basis of the Euler equation for stock index returns or the Euler equation for Treasury bills, in each case distinguishing between asset holders and non–asset holders as best as possible. Estimates of the EIS are around 0.3–0.4 for stockholders and around 0.8–1 for bondholders and are larger for households with larger asset holdings within these two groups.