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Luxury Goods and the Equity Premium

  • YACINE A�T-SAHALIA
  • JONATHAN A. PARKER
  • MOTOHIRO YOGO

This paper evaluates the equity premium using novel data on the consumption of luxury goods. Specifying utility as a nonhomothetic function of both luxury and basic consumption goods, we derive pricing equations and evaluate the risk of holding equity. Household survey and national accounts data mostly reflect basic consumption, and therefore overstate the risk aversion necessary to match the observed equity premium. The risk aversion implied by the consumption of luxury goods is more than an order of magnitude less than that implied by national accounts data. For the very rich, the equity premium is much less of a puzzle. Copyright 2004 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 6 (December)
Pages: 2959-3004

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Handle: RePEc:bla:jfinan:v:59:y:2004:i:6:p:2959-3004
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