Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrelevance Result.

For homothetic time and state separable preferences, the coefficient of relative risk aversion (CRRA) is equal to the reciprocal of the elasticity of intertemporal substitution (EIS). This paper shows that when the growth rate of consumption is i.i.d., asset pricing models based upon preferences in which the CHRA and the EIS are no longer linked do not have more explanatory power. Further, in these stochastic environments, estimates of the CHRA in the standard preferences are measures of the true CHRA and not the EIS. These results are fairly accurate descriptions of economies calibrated using United States annual data. [ABSTRACT FROM AUTHOR]