Garbage as an Alternative Measure of Consumption: Evidence from Korea

We find that using garbage as an alternative measure of consumption allows the standard consumption- based asset pricing model to match the observed equity premium with a more reasonable relative risk aversion coefficient than using standard consumption expenditure in Korea. Structural GMM estimation of the risk aversion parameter shows that when garbage is used, the risk aversion estimate ranges from 4.44 to 6.92, and the implied risk-free rate ranges from 3% to 8%. In contrast, when standard consumption expenditure is used, the estimated risk aversion ranges from 12.89 to 18.34, and the implied risk-free rate ranges from 61% to 82%. Overall, our findings suggest that Savov’s (2011) novel idea of using garbage as an indirect measure of consumption is broadly supported by data in Korea.