NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Luxury Goods and the Equity Premium

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

NBER Working Paper No. 8417
Issued in August 2001
NBER Program(s):   AP

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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Document Object Identifier (DOI): 10.3386/w8417

Published: Journal of Finance, 2004, vol. 59, pp. 2959-3004

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