The Journal of Finance

A Consumption‐Based Explanation of Expected Stock Returns

Published: 03/09/2006   |   DOI: 10.1111/j.1540-6261.2006.00848.x

MOTOHIRO YOGO

When utility is nonseparable in nondurable and durable consumption and the elasticity of substitution between the two consumption goods is sufficiently high, marginal utility rises when durable consumption falls. The model explains both the cross‐sectional variation in expected stock returns and the time variation in the equity premium. Small stocks and value stocks deliver relatively low returns during recessions, when durable consumption falls, which explains their high average returns relative to big stocks and growth stocks. Stock returns are unexpectedly low at business cycle troughs, when durable consumption falls sharply, which explains the countercyclical variation in the equity premium.

The Fragility of Market Risk Insurance

Published: 02/11/2022   |   DOI: 10.1111/jofi.13118

RALPH S.J. KOIJEN, MOTOHIRO YOGO

Variable annuities, which package mutual funds with minimum return guarantees over long horizons, accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the global financial crisis, and insurers made guarantees less generous or stopped offering guarantees to reduce risk exposure. These effects persist in the low‐interest rate environment after the global financial crisis, and variable annuity insurers suffered large equity drawdowns during the COVID‐19 crisis. We develop and estimate a model of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market completeness.

Luxury Goods and the Equity Premium

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00721.x

YACINE AÏT‐SAHALIA, JONATHAN A. PARKER, MOTOHIRO YOGO

This paper evaluates the equity premium using novel data on the consumption of luxury goods. Specifying utility as a nonhomothetic function of both luxury and basic consumption goods, we derive pricing equations and evaluate the risk of holding equity. Household survey and national accounts data mostly reflect basic consumption, and therefore overstate the risk aversion necessary to match the observed equity premium. The risk aversion implied by the consumption of luxury goods is more than an order of magnitude less than that implied by national accounts data. For the very rich, the equity premium is much less of a puzzle.

Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice

Published: 03/18/2015   |   DOI: 10.1111/jofi.12273

RALPH S.J. KOIJEN, STIJN NIEUWERBURGH, MOTOHIRO YOGO

We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life‐cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long‐term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.