Is there Evidence of Pessimism and Doubt in Subjective Distributions? Implications for the Equity Premium Puzzle

Item Type Journal paper
Abstract

Abel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the equity premium puzzle. We quantify the amount of pessimism and doubt in survey data on US consumption and income. Individual forecasters are in fact pessimistic, but show marked overconfidence rather than doubt. However, the implications for Abel's model depend on how the empirically heterogeneous beliefs are mapped into beliefs of a representative agent. We use an Arrow-Debreu economy to show that disagreement increases the equity premium. When incorporating this in our estimation, we find little empirical evidence of either overconfidence or doubt.

Authors Giordani, Paolo & Söderlind, Paul
Journal or Publication Title Journal of Economic Dynamics and Control
Language English
Keywords Keywords: equity premium, riskfree rate, aggregation of beliefs, Survey of Professional Forecasters, Livingston Survey
Subjects other research area
Institute/School s/bf - Swiss Institute of Banking and Finance
HSG Classification not classified
Refereed No
Date 1 June 2006
Publisher Elsevier
Place of Publication Amsterdam
Volume 30
Number 6
Page Range 1027-1043
Number of Pages 17
ISSN 0165-1889
ISSN-Digital 1879-1743
Publisher DOI 10.1016/j.jedc.2005.05.001
Depositing User Prof. PhD. Paul Söderlind
Date Deposited 11 Mar 2005 17:30
Last Modified 23 Aug 2016 10:55
URI: https://www.alexandria.unisg.ch/publications/8738

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Citation

Giordani, Paolo & Söderlind, Paul (2006) Is there Evidence of Pessimism and Doubt in Subjective Distributions? Implications for the Equity Premium Puzzle. Journal of Economic Dynamics and Control, 30 (6). 1027-1043. ISSN 0165-1889

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https://www.alexandria.unisg.ch/id/eprint/8738
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