Is there Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel
AbstractAbel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the riskfree 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.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 519.
Length: 14 pages
Date of creation: 14 Dec 2002
Date of revision: 15 Aug 2003
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More information through EDIRC
equity premium; riskfree rate; aggregation of beliefs; Survey of Professional Forecasters; Livingston Survey;
Other versions of this item:
- Giordani, Paolo & Söderlind, Paul, 2003. "Is There Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel," SIFR Research Report Series 19, Institute for Financial Research.
- Giordani, Paolo & Söderlind, Paul, 2003. "Is There Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel," CEPR Discussion Papers 4068, C.E.P.R. Discussion Papers.
- C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-01-19 (All new papers)
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