Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56203
Authors: 
Giordani, Paolo
Söderkind, Paul
Year of Publication: 
2002
Series/Report no.: 
SSE/EFI Working Paper Series in Economics and Finance 519
Abstract: 
Abel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the riskfree 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.
Subjects: 
equity premium
riskfree rate
aggregation of beliefs
Survey of Professional Forecasters
Livingston Survey
JEL: 
C42
E44
G12
Document Type: 
Working Paper

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