Finance Papers

Document Type

Journal Article

Date of this Version

2004

Publication Source

Journal of Political Economy

Volume

112

Issue

6

Start Page

1223

Last Page

1256

DOI

10.1086/424738

Abstract

We measure the cost of consumption fluctuations using an approach that does not require the specification of preferences and instead uses asset prices. We measure the marginal cost of consumption fluctuations, the per unit benefit of a marginal reduction in consumption fluctuations expressed as a percentage of lifetime consumption. We find that the gains from eliminating all consumption uncertainty are very large. However, for consumption fluctuations corresponding to business cycle frequencies, we estimate the marginal cost to be between 0.08 percent and 0.49 percent of lifetime consumption.

Copyright/Permission Statement

© 2004 by The University of Chicago.

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Date Posted: 27 November 2017

This document has been peer reviewed.