Luxury Goods and the Equity Premium

47 Pages Posted: 17 Oct 2005 Last revised: 23 Oct 2010

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: August 2001

Abstract

This paper evaluates the return on equity using novel data on the consumption of luxury goods. Specifying household utility as a nonhomothetic function of the consumption of both a luxury good and a basic good, we derive and evaluate the riskiness of equity in such a world. Household survey and national accounts consumption data overstate the risk aversion necessary to match the observed equity premium because they contain basic consumption goods. The risk aversion implied by equity returns and the consumption of luxury goods is more than an order of magnitude less than found using national accounts consumption data. For the very rich, the equity premium is much less of a puzzle.

Suggested Citation

Ait-Sahalia, Yacine and Parker, Jonathan A. and Yogo, Motohiro, Luxury Goods and the Equity Premium (August 2001). NBER Working Paper No. w8417, Available at SSRN: https://ssrn.com/abstract=279704

Yacine Ait-Sahalia (Contact Author)

Princeton University - Department of Economics ( email )

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Jonathan A. Parker

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Motohiro Yogo

Princeton University - Department of Economics ( email )

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