Consumption behavior, asset returns, and risk aversion: Evidence from the Japanese household survey

We estimate both a limited participation model by [Mankiw, N.G., Zeldes, S.P., 1991. The consumption of stock holders and non-stock holders. Journal of Financial Economics 29, 97-112] and a persistent income shock model by [Constantinides, G.M., Duffie, D., 1996. Asset pricing with heterogeneous consumers. Journal of Political Economy 104, 219-240]. This is the first paper to use Japanese income-decile consumption survey data to test the equity premium puzzle. We find that the risk aversion coefficients for higher income level households who own larger equity positions are substantially smaller than those for the representative consumer. We conclude that the equity premium puzzle is partly resolved for Japan by the limited participation model, but not by the persistent income shock model.