Equity Premium and Consumption Sensitivity When the Consumer- Investor Allows for Unfavorable Circumstances
AbstractIntroducing one additional element due to possible misfortune to the return of each of two assets in the basic model of Samuelson (Rev.Econom.Statist.51 (1969)239)on optimum portfolio and consumption decisions,this paper resolves both the excess equity premium and the excess consumption sensitivity puzzles.This uni ed treatment provides a framework to study how important state variables will a ect the change in aggregate consumption which is consid- ered unpredictable in one formulation of the permanent income hypothesis.The implications of the theory agree with empirical results reported here and elsewhere.The theoretical framework appears to be simple and powerful as compared with alternative theories to explain the two puzzles.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0306012.
Date of creation: 10 Jun 2003
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Note: Published in Journal of Economic Dynamics &Control 26 (2002) pp 1417-–1429
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Optimum consumption and investment; Asset pricing; Consumption sensitivity; Robust control; The Lagrange method;
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- E - Macroeconomics and Monetary Economics
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