Premium
Luxury Goods and the Equity Premium
Author(s) -
AÏTSAHALIA YACINE,
PARKER JONATHAN A.,
YOGO MOTOHIRO
Publication year - 2004
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2004.00721.x
Subject(s) - equity premium puzzle , consumption (sociology) , economics , equity (law) , equity risk , risk premium , survey data collection , risk aversion (psychology) , financial economics , microeconomics , finance , expected utility hypothesis , valuation (finance) , social science , statistics , mathematics , sociology , political science , law
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.