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Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns

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  • Carlo Favero

Abstract

Consumption is striking back. Some recent evidence indicates that the well-known asset pricing puzzles generated by the difficulties of matching fluctuations in asset prices with high frequency fluctuations in consumption might be solved found by considering consumption in the long-run. A first strand of the literature concentrates on multiperiod differences in log consumption, a second concentrates on the cointegrating relation for consumption. Interestingly, only the (multiperiod)Euler Equation for the consumer optimization problem is considered by the first strand of the literature, while the cointegrationbased literature concentrates exclusively on the (linearized) intertemporal budget constraint. In this paper, we show that using the first order condition in the linearized budget constraint to derive an explicit long-run consumption function delivers an even more striking strike back.

Suggested Citation

  • Carlo Favero, 2005. "Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns," Working Papers 291, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:291
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    References listed on IDEAS

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    1. Ravi Bansal & Robert F. Dittmar & Christian T. Lundblad, 2005. "Consumption, Dividends, and the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 60(4), pages 1639-1672, August.
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    Cited by:

    1. Wigniolle, Bertrand, 2012. "Savings behavior with imperfect capital markets: When hyperbolic discounting leads to discontinuous strategies," Economics Letters, Elsevier, vol. 116(2), pages 186-189.
    2. Slobodan Djajić, 2014. "Temporary Emigration And Welfare: The Case Of Low‐Skilled Labor," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 551-574, May.
    3. repec:hal:pseose:halshs-00684210 is not listed on IDEAS
    4. Slobodan Djajić, 2014. "Temporary Migration and the Flow of Savings to the Source Country," Review of Development Economics, Wiley Blackwell, vol. 18(1), pages 162-176, February.
    5. Slobodan Djajić & Alexandra Vinogradova, 2015. "Overstaying Guest Workers and the Incentives for Return," CESifo Economic Studies, CESifo Group, vol. 61(3-4), pages 764-796.
    6. Djajić, Slobodan, 2014. "Asylum seeking and irregular migration," International Review of Law and Economics, Elsevier, vol. 39(C), pages 83-95.
    7. Slobodan Djajić, 2017. "Transit migration," Review of International Economics, Wiley Blackwell, vol. 25(5), pages 1017-1045, November.
    8. Muhammad Naveed Tahir, 2011. "Inflation Targeting, Exchange Rate and Financial Globalization," Working Papers 1130, Groupe d'Analyse et de Théorie Economique Lyon St-Etienne (GATE Lyon St-Etienne), Université de Lyon.
    9. Slobodan Djajić, 2010. "Investment opportunities in the source country and temporary migration," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(2), pages 663-682, May.
    10. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.
    11. Ricardo Sousa, 2011. "Building proxies that capture time-variation in expected returns using a VAR approach," Applied Financial Economics, Taylor & Francis Journals, vol. 21(3), pages 147-163.
    12. Knapp, Keith C. & Franklin, Bradley, "undated". "Sustainability Economics of Groundwater Usage and Management," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124959, Agricultural and Applied Economics Association.
    13. Growiec Jakub, 2006. "Fertility Choice and Semi-Endogenous Growth: Where Becker Meets Jones," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-25, September.
    14. Alberto Bucci, 2012. "Public Capital, Private Capital and Economic Growth," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 120(2), pages 149-180.
    15. Ricardo M. Sousa, 2007. "Expectations, Shocks, and Asset Returns," NIPE Working Papers 29/2007, NIPE - Universidade do Minho.
    16. Chang, Yanqin, 2007. "high level of international risk sharing when the productivity growth contains long run risk," MPRA Paper 4476, University Library of Munich, Germany.
    17. Fernandez-Corugedo, Emilio & Price, Simon & Blake, Andrew P., 2007. "The dynamics of aggregate UK consumers' non-durable expenditure," Economic Modelling, Elsevier, vol. 24(3), pages 453-469, May.
    18. Muhammad Naveed Tahir, 2011. "Inflation Targeting, Exchange Rate and Financial Globalization," Working Papers halshs-00646601, HAL.

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    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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