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Luxury Goods and the Equity Premium

  • Yacine Ait-Sahalia
  • Jonathan A. Parker
  • Motohiro Yogo

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
Date of revision:
Publication status: published as Journal of Finance, 2004, vol. 59, pp. 2959-3004
Handle: RePEc:nbr:nberwo:8417
Note: AP
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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