Equity premium and consumption sensitivity when the consumer–investor allows for unfavorable circumstances
✍ Scribed by Gregory C. Chow; Lihui Zheng
- Publisher
- Elsevier Science
- Year
- 2002
- Tongue
- English
- Weight
- 127 KB
- Volume
- 26
- Category
- Article
- ISSN
- 0165-1889
No coin nor oath required. For personal study only.
✦ Synopsis
Introducing one additional element due to possible misfortune to the return of each of two assets in the basic model of Samuelson (Rev. Econom. Statist. 51 (1969) 239) on optimum portfolio and consumption decisions, this paper resolves both the excess equity premium and the excess consumption sensitivity puzzles. This uniÿed treatment provides a framework to study how important state variables will a ect the change in aggregate consumption which is considered unpredictable in one formulation of the permanent income hypothesis. The implications of the theory agree with empirical results reported here and elsewhere. The theoretical framework appears to be simple and powerful as compared with alternative theories to explain the two puzzles.