Is There Evidence of Pessimism and Doubt in Subjective Distributions? Implications for the Equity Premium Puzzle

27 Pages Posted: 3 Jun 2009 Last revised: 11 Jun 2013

See all articles by Paolo Giordani

Paolo Giordani

Norwegian Business School

Paul Söderlind

University of St. Gallen; Centre for Economic Policy Research (CEPR); University of St. Gallen - School of Finance

Date Written: April 27, 2005

Abstract

Abel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the equity premium puzzle. We quantify the amount of pessimism and doubt in survey data on US consumption and income. Individual forecasters are in fact pessimistic, but show marked overconfidence rather than doubt. However, the implications for Abel's model depends on how the empirically heterogeneous beliefs are mapped into beliefs of a representative agent. We use an Arrow-Debreu economy to show that disagreement increases the equity premium. When incorporating this in our estimation, we find little empirical evidence of either overconfidence or doubt.

Keywords: equity premium, riskfree rate, aggregation of beliefs, Survey of Professional Forecasters, Livingston Survey

JEL Classification: C42, G12, E44

Suggested Citation

Giordani, Paolo and Söderlind, Paul, Is There Evidence of Pessimism and Doubt in Subjective Distributions? Implications for the Equity Premium Puzzle (April 27, 2005). Journal of Economic Dynamics and Control, Vol. 30, pp. 1027-1043, 2006, Available at SSRN: https://ssrn.com/abstract=1413203

Paolo Giordani

Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Paul Söderlind (Contact Author)

University of St. Gallen ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland
+41 71 224 7064 (Phone)
+41 71 224 7088 (Fax)

HOME PAGE: http://https://sites.google.com/site/paulsoderlindecon/home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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