Is there evidence of pessimism and doubt in subjective distributions? Implications for the equity premium puzzle [An article from: Journal of Economic Dynamics and Control]

by P. Giordani, P. Soderlind

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This digital document is a journal article from Journal of Economic Dynamics and Control, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

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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. s the equity premium. When incorporating this in our estimation, we find little empirical evidence of either overconfidence or doubt.

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