Aggregation, Liquidity, and Asset Prices with Incomplete Markets

Sebastian Di Tella, Benjamin Hebert and Pablo Kurlat

No 32268, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analytically characterize asset-pricing and consumption behavior in two-account heterogeneous-agent models with aggregate risk. We show that trading frictions can simultaneously explain (1) household-level consumption behavior such as high marginal propensities to consume, (2) a zero-beta rate on equities that satisfies an aggregate consumption Euler equation, (3) a return on safe assets that does not, and (4) a flat securities market line. The return of equities is well explained by aggregate consumption, while the return of safe assets reflects a large and volatile liquidity premium.

JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2024-03
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