Switching Regression Estimates of EIS for Stockholders and Non-Stockholders

This paper analyzes a panel data set of Panel Study of Income Dynamics (PSID) households and demonstrates that the estimate of EIS (Elasticity of Intertemporal Substitution) for stockholders and non-stockholders is large and dierent between them, based upon the consumption-based capital asset pricing model (CAPM). However, recognizing possible laxities in defining and measuring stockholding status, and hence allowing for possible misclassification error therein, I use the switching regression framework to show the evidence that there is a significant portion of stockholders misclassified as non-stockholders. The correction for this misclassification error results in closer gap of EIS between these two groups. Estimates after the correction are in line with those found in repeated cross-section Consumer Expenditure Survey (CEX) samples, whereas estimates without the correction are not. This illustrates the importance of accounting for misclassification error in such contexts. To some extent this result along with others of this research validates the use of repeated cross-section data in quatitative estimation of CAPM.