Scandinavian Working Papers in Economics
SIFR Research Report Series,
Institute for Financial Research
No 19: Is There Evidence of Pessimism and Doubt in Subjective Distributions? A Comment on Abel
Paolo Giordani () and Paul Söderlind ()
Additional contact information
Paolo Giordani: University of New South Wales
Paul Söderlind: University of St. Gallen, Postal: CEPR and Swedish Institute for Financial Research
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.
Keywords: Equity premium; Riskfree rate; Aggregation of beliefs; Survey of Professional Forecasters; Livingston Survey
20 pages, August 15, 2003
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sifr-wp19.pdf
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