Idiosyncratic risk and the equity premium: evidence from the consumer expenditure survey

Cogley, Timothy

doi:10.1016/s0304-3932(01)00106-4

Cited by 125 publications

(121 citation statements)

References 32 publications

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“…While the representative agent approach (Hansen and Singleton, 1983) considers only aggregate consumption (the cross-sectional mean of the consumption distribution), these papers try the cross-sectional mean, variance, and skewness of the consumption growth distribution. Brav et al (2002) find that the IMRS SDF explains the equity premium for γ ≈ 3.5, but Cogley (2002) finds that the equity premium is not explained for γ < 15. Vissing-Jørgensen (2002) follows a similar approach, but her focus is the estimation of the elasticity of intertemporal substitution and not the equity premium.…”

Section: Resultsmentioning

confidence: 97%

“…Brav et al (2002) and Cogley (2002) employ linearized versions of the sample analog of the IMRS stochastic discount factor. While the representative agent approach (Hansen and Singleton, 1983) considers only aggregate consumption (the cross-sectional mean of the consumption distribution), these papers try the cross-sectional mean, variance, and skewness of the consumption growth distribution.…”

Section: Resultsmentioning

confidence: 99%

“…The first approach is to average the marginal rate of substitution as in Brav et al (2002) and Cogley (2002), which are based on the theoretical model of Constantinides and Duffie (1996). Dividing (2.1) by c −γ it , conditioning on aggregate variables F t , and applying the law of iterated expectations, we obtain…”

Section: Euler Equation Aggregationsmentioning

confidence: 99%

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The Double Power Law in Consumption and Implications for Testing Euler Equations

Toda

Walsh

2015

Journal of Political Economy

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We provide evidence suggesting that the cross-sectional distributions of U.S. consumption and consumption growth obey the power law in both the upper and lower tails, with exponents approximately equal to 4. Consequently, high order moments are unlikely to exist, and the GMM estimation of Euler equations that employ cross-sectional moments may be inconsistent. Through bootstrap studies, we find that the power law appears to generate spurious non-rejection of heterogeneous-agent asset pricing models in explaining the equity premium. Dividing households into age groups, we propose an estimation approach which appears less susceptible to fat tail issues.

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Section: Resultsmentioning

confidence: 97%

Section: Resultsmentioning

confidence: 99%

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The Double Power Law in Consumption and Implications for Testing Euler Equations

Toda

Walsh

2015

Journal of Political Economy

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“…14 The error terms in those equations are assumed to have mean zero, but no other assumptions are imposed. In particular, we do not make any assumptions on the correlation between the error term and the time varying variances of the idiosyncratic shocks, so we basically treat these time varying variances as time-specific fixed effects or time dummies.…”

Section: Generalized Methods Of Momentsmentioning

confidence: 99%

“…1 In this paper we try to gain some insight in the type of income risk that was mainly responsible for this increase. In a series of papers, Gottschalk and Moffitt (1994, Moffitt and Gottschalk 1995, 2002 try to measure the extent to which the increase in earnings inequality could have been merely an increase in 'churning' or transitory movement in earnings. The welfare implications of such an increase in transitory inequality would be very different from the implications of an increase in the variance of permanent income.…”

Section: Introductionmentioning

confidence: 99%

Inequality over the Business Cycle: Estimating Income Risk using Micro-Data on Consumption

Primiceri

Rens

2002

SSRN Journal

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We use CEX repeated cross-section data on consumption and income, to evaluate the nature of increased income inequality in the 1980s and 90s. We decompose unexpected changes in family income into transitory and permanent, and idiosyncratic and aggregate components, and estimate the contribution of each component to total inequality. The model we use is a linearized incomplete markets model, enriched to incorporate risk-sharing while maintaining tractability. Our estimates suggest that taking risk sharing into account is important for the model fit; that the increase in inequality in the 1980s was mainly permanent; and that inequality is driven almost entirely by idiosyncratic income risk. In addition we find no evidence for cyclical behavior of consumption risk, casting doubt on Constantinides and Duffie's (1995) explanation for the equity premium puzzle.Keywords: consumption, inequality, risk, incomplete markets, business cycle JEL classification: D12 D31 D52 D91 E21 E32 G10 * We would like to thank Pierre-Olivier Gourinchas for getting us started on this project and for his help throughout and Bruce Preston for sharing his experience with the CEX data. We are also grateful for helpful suggestions from

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Estimation of the consumption CAPM with imperfect sample separation information

Semenov

2007

Int. J Fin Econ

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We propose a consumption-based capital asset pricing model consumption (CAPM), in which the pricing kernel is calculated as the average of individuals' intertemporal marginal rates of substitution weighted by the probabilities of holding the asset in question. These probabilities are conditional on available imperfect sample separation information and are estimated simultaneously with the parameters of Euler equations. Using data from the US Consumer Expenditure Survey, we find that the consumption CAPM with probability-weighted agents yields a more precise estimate of the agent's risk aversion compared with the model, in which the available imperfect information on asset-holding status is erroneously regarded as a perfect sample separation indicator. Copyright © 2007 John Wiley & Sons, Ltd.

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Idiosyncratic risk and the equity premium: evidence from the consumer expenditure survey

Cited by 125 publications

References 32 publications

The Double Power Law in Consumption and Implications for Testing Euler Equations

The Double Power Law in Consumption and Implications for Testing Euler Equations

Inequality over the Business Cycle: Estimating Income Risk using Micro-Data on Consumption

Estimation of the consumption CAPM with imperfect sample separation information

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