Luxury Goods and the Equity Premium
60 Pages Posted: 19 May 2003 Last revised: 17 Jun 2009
Date Written: November 25, 2003
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: Suggested Citation