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Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns

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  • Carlo Favero

Abstract

Consumption is striking back. Some recent evidence indicates that the well-known asset pricing puzzles generated by the difficulties of matching fluctuations in asset prices with high frequency fluctuations in consumption might be solved found by considering consumption in the long-run. A first strand of the literature concentrates on multiperiod differences in log consumption, a second concentrates on the cointegrating relation for consumption. Interestingly, only the (multiperiod)Euler Equation for the consumer optimization problem is considered by the first strand of the literature, while the cointegrationbased literature concentrates exclusively on the (linearized) intertemporal budget constraint. In this paper, we show that using the first order condition in the linearized budget constraint to derive an explicit long-run consumption function delivers an even more striking strike back.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 291.

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Date of creation: 2005
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Handle: RePEc:igi:igierp:291

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  1. Ravi Bansal & Robert F. Dittmar & Christian T. Lundblad, 2005. "Consumption, Dividends, and the Cross Section of Equity Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 60(4), pages 1639-1672, 08.
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Cited by:
  1. Bertrand Wigniolle, 2011. "Savings behavior with imperfect capital markets: when hyperbolic discounting leads to discontinuous strategies," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 11028, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Ricardo M. Sousa, 2007. "Expectations, Shocks, and Asset Returns," NIPE Working Papers, NIPE - Universidade do Minho 29/2007, NIPE - Universidade do Minho.
  3. Chang, Yanqin, 2007. "high level of international risk sharing when the productivity growth contains long run risk," MPRA Paper 4476, University Library of Munich, Germany.
  4. GROWIEC, Jakub, 2006. "Fertility choice and semi-endogenous growth: where Becker meets Jones," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2006023, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Ricardo Sousa, 2011. "Building proxies that capture time-variation in expected returns using a VAR approach," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(3), pages 147-163.
  6. Knapp, Keith C. & Franklin, Bradley, 2012. "Sustainability Economics of Groundwater Usage and Management," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 124959, Agricultural and Applied Economics Association.

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