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Discretionary Consumption and the Equity Premium : Evidence from Korea

  • Jaehoon Hahn Associate Professor, School of Business, Yonsei University
  • Yong Joo Kang Doctoral Student, School of Business, Yonsei University
  • Yuna Sohn Doctoral Student, School of Business, Yonsei University
Ait-Sahalia, Parker, and Yogo (2004) suggest using luxury goods retail sales data as an alternative measure of consumption to obtain more reasonable estimates for the coefficient of relative risk aversion that better match the observed equity premium. We apply their novel idea of using data that reflect discretionary consumption by the wealthy to the Korean context by using sales revenue of three largest sellers of high-end whisky and two major airlines as proxies for discretionary consumption that are more likely to respond to movements in the stock market. When theses proxies for discretionary consumption are used in place of standard consumption, the estimates for relative risk aversion are an order of magnitude smaller and economically plausible, similar to the findings reported by Ait-Sahalia et al. (2004) for the United States.

  • Jaehoon Hahn
  • Yong Joo Kang
  • Yuna Sohn
Ait-Sahalia, Parker, and Yogo (2004) suggest using luxury goods retail sales data as an alternative measure of consumption to obtain more reasonable estimates for the coefficient of relative risk aversion that better match the observed equity premium. We apply their novel idea of using data that reflect discretionary consumption by the wealthy to the Korean context by using sales revenue of three largest sellers of high-end whisky and two major airlines as proxies for discretionary consumption that are more likely to respond to movements in the stock market. When theses proxies for discretionary consumption are used in place of standard consumption, the estimates for relative risk aversion are an order of magnitude smaller and economically plausible, similar to the findings reported by Ait-Sahalia et al. (2004) for the United States.
Coefficient of Relative Risk Aversion, Equity Premium Puzzle, Discretionary Consumption, Luxury Goods, Method of Moments