Abstract
Correlations of monthly, quarterly and annual consumption growth rates, calculated from novel weekly Gallup consumption data, with the equity premium are high – 13%, 44% and 54% at monthly, quarterly and yearly frequency. The power utility consumption CAPM prices the sample average annual equity premium of 4.9%, with estimated relative risk aversion parameters of 2.41, 0.96 and 1.04 at the monthly, quarterly and annual frequency. I can reject at 95% level of confidence relative risk aversion parameter larger than 13.62, 5.18 and 5.36 at the monthly, quarterly and annual frequency. My results suggest that the equity premium puzzle is an artifact arising from bad data, not from a bad model.
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