ESTIMATING THE DEMAND FOR RISKY ASSETS VIA THE INDIRECT EXPECTED UTILITY FUNCTION

This article obtains demand functions for risky assets without making a priori assumptions about the form of the utility function. In a simp le portfolio model, the envelope theorem is applied to the indirect ex pected utility function to derive estimating equations. Tests for the existence of constant absolute or constant relative risk aversion are also developed. Empirical estimation of the demand for financial asset s held by US. households for the period 1946-1985 indicates that aggre gate household behavior is consistent with the existence of constant r elative risk aversion, with the coefficient of risk aversion having a value of approximately 1.3.