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Is There Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel

  • Giordani, Paolo
  • Söderlind, Paul

Abel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the risk-free rate puzzle and the equity premium puzzle. We quantify the amount of pessimism and doubt in survey data on US consumption and income. Individual forecasters are, in fact, pessimistic, but show marked overconfidence rather than doubt. Whether this implies that overconfidence should be built into Abel’s model depends on how the empirically heterogeneous subjective distributions are mapped into the distribution of a fictitious representative agent. We work out the form of this mapping in an Arrow-Debreu economy and show that the equity premium increases with the dispersion of beliefs. We then estimate this aggregate distribution and find little evidence of either overconfidence or doubt.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4068.

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Date of creation: Sep 2003
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Handle: RePEc:cpr:ceprdp:4068
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  1. Andrew B. Abel, 2001. "An Exploration of the Effects of Pessimism and Doubt on Asset Returns," NBER Working Papers 8132, National Bureau of Economic Research, Inc.
  2. Nicholas BARBERIS & Ming HUANG & Tano SANTOS, 2000. "Prospect Theory and Asset Prices," FAME Research Paper Series rp16, International Center for Financial Asset Management and Engineering.
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  4. Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
  6. Louis K. C. Chan & Jason Karceski & Josef Lakonishok, 2003. "The Level and Persistence of Growth Rates," Journal of Finance, American Finance Association, vol. 58(2), pages 643-684, 04.
  7. Richard H. Thaler, 2000. "From Homo Economicus to Homo Sapiens," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 133-141, Winter.
  8. Varian, Hal R, 1985. " Divergence of Opinion in Complete Markets: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 309-17, March.
  9. Giordani, Paolo & Soderlind, Paul, 2000. "Inflation Forecast Uncertainty," SSE/EFI Working Paper Series in Economics and Finance 384, Stockholm School of Economics, revised 09 Oct 2000.
  10. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  11. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
  12. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
  13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  14. Aaron Tornell, 2000. "Robust-H-infinity Forecasting and Asset Pricing Anomalies," NBER Working Papers 7753, National Bureau of Economic Research, Inc.
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