Luxury goods and the equity premium

Yacine Aït-Sahalia, Jonathan A. Parker, Motohiro Yogo

Research output: Contribution to journalReview article

107 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)2959-3004
Number of pages46
JournalJournal of Finance
Volume59
Issue number6
DOIs
StatePublished - Dec 2004

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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