Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns

32 Pages Posted: 8 Aug 2005

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Economics; Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

Consumption is striking back. Some recent evidence indicates that the well-known asset pricing puzzles generated by the difficulties of matching fluctuations in asset prices with high frequency fluctuations in consumption might be solved by considering consumption in the long-run. A first strand of the literature concentrates on multiperiod differences in log consumption, a second concentrates on the cointegrating relation for consumption. Interestingly, only the (multiperiod) Euler Equation for the consumer optimization problem is considered by the first strand of the literature, while the cointegration-based literature concentrates exclusively on the (linearized) intertemporal budget constraint. In this paper, we show that using the first order condition in the linearized budget constraint to derive an explicit long-run consumption function delivers an even more striking strike back.

Keywords: Cointegrating consumption function, long-run stock market returns, elasticity of intertemporal substitution

JEL Classification: E20, E44, G12

Suggested Citation

Favero, Carlo A., Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns (June 2005). CEPR Discussion Paper No. 5110, Available at SSRN: https://ssrn.com/abstract=779344

Carlo A. Favero (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
23
Abstract Views
1,106
PlumX Metrics