Luxury Goods and the Equity Premium
with Y. Ait-Sahalia and M. Yogo
Journal of Finance , Vol 59 No 6, (December 2004) 2959-3004.
This paper evaluates the return on equity using novel data on the consumption of luxury goods. Specifying household utility as a nonhomothetic function of the consumption of both a luxury good and a basic good, we derive and evaluate the riskiness of equity in such a world. Household survey and national accounts consumption data overstate the risk aversion necessary to match the observed equity premium because they contain basic consumption goods. The risk aversion implied by equity returns and the consumption of luxury goods is more than an order of magnitude less than found using national accounts consumption data. For the very rich, the equity premium is much less of a puzzle.

The published version of the paper
WWS Discussion Paper 222, August 2002
NBER WP 8417, August 2001

Luxury retail sales data for the paper (excluding cross-sectional results).