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

Carlo Favero ()

No 5110, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: E20 E44 G12 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-bec, nep-fin, nep-fmk, nep-mac and nep-pbe
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Citations: View citations in EconPapers (17)

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Working Paper: Consumption, Wealth, the Elasticity of Intertemporal Substitution and Long-Run Stock Market Returns (2005)
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