Is There Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel

Söderlind, Paul and Paolo Giordani ()
Authors registered in the RePEc Author Service: Paul Söderlind

No 4068, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Abel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the risk-free rate puzzle and 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. Whether this implies that overconfidence should be built into Abel?s model depends on how the empirically heterogeneous subjective distributions are mapped into the distribution of a fictitious representative agent. We work out the form of this mapping in an Arrow-Debreu economy and show that the equity premium increases with the dispersion of beliefs. We then estimate this aggregate distribution and find little evidence of either overconfidence or doubt.

Keywords: C42; Equity premium; Risk-free rate; Aggregation of beliefs; Survey of professional forecasters; Livingston survey (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2003-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: Is there Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel (2003)
Working Paper: Is There Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel (2003)
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