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Luxury Goods and the Equity Premium
Yacine Ait-Sahalia Princeton University - Department of Economics; National Bureau of Economic Research (NBER) Jonathan A. Parker Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; National Bureau of Economic Research (NBER) Motohiro Yogo University of Pennsylvania - Finance Department; National Bureau of Economic Research Journal of Finance, Vol. 59, No. 6, 2004 Abstract: This paper evaluates the equity premium using novel data on the consumption of luxury goods. Specifying utility as a nonhomothetic function of both luxury and basic consumption goods, we derive pricing equations and evaluate the risk of holding equity. Household survey and national accounts data mostly reflect basic consumption and therefore overstate the risk aversion necessary to match the observed equity premium. The risk aversion implied by the consumption of luxury goods is more than an order of magnitude less than that implied by national accounts data. For the very rich, the equity premium is much less of a puzzle.
Keywords: Asset pricing, Consumption, Equity premium puzzle, Portfolio choice JEL Classifications: D12, E21, G12 Accepted Paper SeriesDate posted: May 19, 2003 ; Last revised: June 17, 2009Suggested CitationContact Information
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