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The Spirit of Capitalism and Asset Pricing: an Empirical Investigation

  • Qiang Zhang

    (Department of Economics, Fogelman College of Business & Economics, University of Memphis)

We extend and test two models of aggregate asset pricing that feature status-seeking through accumulation of not only financial assets but also human capital. We use weak-identification robust tests to confront these models with U.S. data. Contrary to previous results, we find that the spirit of capitalism hypothesis, modeled as either direct preference for wealth or pursuit of relative wealth status, is rejected in the aggregate data. Therefore, adding status motive alone to an otherwise standard model may not be sufficient to resolve the equity premium puzzle.

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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-428.

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Length: 34pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:tky:fseres:2006cf428
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  1. Gong, Liutang & Zou, Heng-fu, 2002. "Direct preferences for wealth, the risk premium puzzle, growth, and policy effectiveness," Journal of Economic Dynamics and Control, Elsevier, vol. 26(2), pages 247-270, February.
  2. Heng-fu Zou, 1991. "The spirit of capitalism and long-run growth," Policy Research Working Paper Series 630, The World Bank.
  3. Smith, William T, 2001. "How Does the Spirit of Capitalism Affect Stock Market Prices?," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1215-32.
  4. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
  5. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
  6. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
  7. Zhang, Qiang, 2006. "Human Capital, Weak Identification, and Asset Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 873-899, June.
  8. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, vol. 94(1), pages 276-299, March.
  9. Martin Lettau, 2000. "Cross-variable restrictions in Euler equations and risk premia," Applied Economics Letters, Taylor & Francis Journals, vol. 7(2), pages 99-101.
  10. Karl Whelan & Jeremy Rudd, 2006. "Empirical proxies for the consumption–wealth ratio," Open Access publications 10197/212, School of Economics, University College Dublin.
  11. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
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