Citation

Discussion Paper Details

Please find the details for DP5110 in an easy to copy and paste format below:

Full Details

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

Author(s): Carlo A. Favero

Publication Date: June 2005

Keyword(s): cointegrating consumption function, elasticity of intertemporal substitution and long-run stock market returns

Programme Area(s): International Macroeconomics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5110

Bibliographic Reference

Favero, C. 2005. 'Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5110