Is There Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel

22 Pages Posted: 19 Nov 2003

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: September 2003

Abstract

Abel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the risk-free rate puzzle and 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. Whether this implies that overconfidence should be built into Abel's model depends on how the empirically heterogeneous subjective distributions are mapped into the distribution of a fictitious representative agent. We work out the form of this mapping in an Arrow-Debreu economy and show that the equity premium increases with the dispersion of beliefs. We then estimate this aggregate distribution and find little evidence of either overconfidence or doubt.

Keywords: Equity premium, risk-free rate, aggregation of beliefs, survey of professional forecasters, Livingston survey

Keywords: Equity premium, risk-free rate, aggregation of beliefs, survey of professional forecasters, Livingston survey

JEL Classification: C42, E44, G12

Suggested Citation

Giordani, Paolo and Söderlind, Paul, Is There Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel (September 2003). Available at SSRN: https://ssrn.com/abstract=470782

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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