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Luxury Goods and the Equity Premium

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Author Info
Yacine Ait-Sahalia
Jonathan A. Parker
Motohiro Yogo

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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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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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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James Andreoni, 2001. "Giving According to GARP," Theory workshop papers 339, UCLA Department of Economics. [Downloadable!]
  2. Attanasio, O.P. & Browning, M., 1993. "Consumption Over the Life Cycle and Over the Business Cycle," Papers 9314, Tilburg - Center for Economic Research.
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