Luxury Goods and the Equity Premium

60 Pages Posted: 19 May 2003 Last revised: 17 Jun 2009

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: November 25, 2003

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 Classification: D12, E21, G12

Suggested Citation

Ait-Sahalia, Yacine and Parker, Jonathan A. and Yogo, Motohiro, Luxury Goods and the Equity Premium (November 25, 2003). Journal of Finance, Vol. 59, No. 6, 2004, Available at SSRN: https://ssrn.com/abstract=385243 or http://dx.doi.org/10.2139/ssrn.385243

Yacine Ait-Sahalia (Contact Author)

Princeton University - Department of Economics ( email )

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Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Motohiro Yogo

Princeton University - Department of Economics ( email )

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National Bureau of Economic Research

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