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Luxury Goods and the Equity Premium

Yacine Aït-Sahalia, Jonathan A. Parker and Motohiro Yogo
The Journal of Finance
Vol. 59, No. 6 (Dec., 2004), pp. 2959-3004
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/3694794
Page Count: 46
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Luxury Goods and the Equity Premium
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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.

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