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Luxury Goods and the Equity Premium

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  • Yacine Ait-Sahalia
  • Jonathan A. Parker
  • Motohiro Yogo

Abstract

This paper evaluates the return on equity using novel data on the consumption of luxury goods. Specifying household utility as a nonhomothetic function of the consumption of both a luxury good and a basic good, we derive and evaluate the riskiness of equity in such a world. Household survey and national accounts consumption data overstate the risk aversion necessary to match the observed equity premium because they contain basic consumption goods. The risk aversion implied by equity returns and the consumption of luxury goods is more than an order of magnitude less than found using national accounts consumption data. For the very rich, the equity premium is much less of a puzzle.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8417.

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Date of creation: Aug 2001
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Publication status: published as Journal of Finance, 2004, vol. 59, pp. 2959-3004
Handle: RePEc:nbr:nberwo:8417

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