When utility is nonseparable in nondurable and durable consumption and the elasticity of substitution between the two consumption goods is sufficiently high, marginal utility rises when durable ...consumption falls. The model explains both the cross-sectional variation in expected stock returns and the time variation in the equity premium. Small stocks and value stocks deliver relatively low returns during recessions, when durable consumption falls, which explains their high average returns relative to big stocks and growth stocks. Stock returns are unexpectedly low at business cycle troughs, when durable consumption falls sharply, which explains the countercyclical variation in the equity premium.
In the instrumental variables (IV) regression model, weak instruments can lead to bias in estimators and size distortion in hypothesis tests. This paper examines how weak instruments affect the ...identification of the elasticity of intertemporal substitution (EIS) through the linearized Euler equation. Conventional IV methods result in an empirical puzzle that the EIS is significantly less than 1 but its reciprocal is not different from 1. This paper shows that weak instruments can explain the puzzle and reports valid confidence intervals for the EIS using pivotal statistics. The EIS is less than 1 and not significantly different from 0 for eleven developed countries.
In a life-cycle model, a retiree faces stochastic health depreciation and chooses consumption, health expenditure, and the allocation of wealth between bonds, stocks, and housing. The model explains ...key facts about asset allocation and health expenditure across health status and age. The portfolio share in stocks is low overall and is positively related to health, especially for younger retirees. The portfolio share in housing is negatively related to health for younger retirees and falls significantly in age. Finally, out-of-pocket health expenditure as a share of income is negatively related to health and rises in age.
•A life-cycle model of health expenditure and portfolio choice with health risk.•Key inputs are estimated including Medicare and Social Security benefits.•Explains key facts about asset allocation across bonds, stocks, and housing.•Key mechanisms are the horizon effect and decreasing returns to health investment.
We develop a life-cycle consumption and portfolio choice model in which households have nonhomothetic utility over two types of goods, basic and luxury. We calibrate the model to match the ...cross-sectional and life-cycle variation in the basic expenditure share in the Consumer Expenditure Survey. The model explains the degree to which the portfolio share in risky assets rises in wealth in the cross-section of households in the Survey of Consumer Finances. For a given household, the portfolio share can fall in response to an increase in wealth, even though the model implies decreasing relative risk aversion.
We use new and comprehensive data on the security holdings of euro-area investors to document facts about the ongoing quantitative easing program. The holdings of purchase-eligible government bonds ...have strong home bias not only for banks but also for insurance companies, pension funds, and mutual funds, especially in the vulnerable countries. In response to the program, foreign investors sold most of the purchase-eligible government bonds. Banks also sold purchase-eligible government bonds to a lesser extent, but insurance companies and pension funds bought them. Thus, quantitative easing may have reduced the duration mismatch for these institutions.
Weak instruments arise when the instruments in linear instrumental variables (IV) regression are weakly correlated with the included endogenous variables. In generalized method of moments (GMM), more ...generally, weak instruments correspond to weak identification of some or all of the unknown parameters. Weak identification leads to GMM statistics with nonnormal distributions, even in large samples, so that conventional IV or GMM inferences are misleading. Fortunately, various procedures are now available for detecting and handling weak instruments in the linear IV model and, to a lesser degree, in nonlinear GMM.
The demand for durable goods is more cyclical than that for nondurable goods and services. Consequently, the cash flows and stock returns of durable‐good producers are exposed to higher systematic ...risk. Using the benchmark input‐output accounts of the National Income and Product Accounts, we construct portfolios of durable‐good, nondurable‐good, and service producers. In the cross section, an investment strategy that is long on the durable‐good portfolio and short on the service portfolio earns a risk premium exceeding 4 percent annually. In the time series, an investment strategy that is long on the durable‐good portfolio and short on the market portfolio earns a countercyclical risk premium. We explain these findings in a general equilibrium asset‐pricing model with endogenous production.
Luxury Goods and the Equity Premium AÏT-SAHALIA, YACINE; PARKER, JONATHAN A.; YOGO, MOTOHIRO
The Journal of finance (New York),
December 2004, Volume:
59, Issue:
6
Journal Article
Peer reviewed
Open access
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.
Multiresolution wavelet analysis is a natural way to decompose an economic time series into trend, cycle, and noise. The method is illustrated with GDP data. The business-cycle component of the ...wavelet-filtered series closely resembles the series filtered by the approximate bandpass filter.
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