Asset Pricing Implications of Pareto Optimality with Private Information

Narayana Kocherlakota and Luigi Pistaferri

Journal of Political Economy, 2009, vol. 117, issue 3, 555-590

Abstract: We compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained Pareto-optimal allocations. We represent the models' stochastic discount factors in terms of the cross-sectional distribution of consumption and use these representations to evaluate the models' empirical implications. The first model is inconsistent with the equity premium in the United States, United Kingdom, and Italy. The second model is consistent with the equity premium and the risk-free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0.5. (c) 2009 by The University of Chicago. All rights reserved.

Date: 2009
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Related works:
Working Paper: Asset Pricing Implications of Pareto Optimality with Private Information (2007)
Working Paper: Asset Pricing Implications of Pareto Optimality with Private Information (2005)
Working Paper: Asset Pricing Implications of Pareto Optimality with Private Information (2005)
Working Paper: Asset Pricing Implications of Pareto Optimality with Private Information (2004)
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