Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence

Alon Brav, George Constantinides and Christopher Geczy ()

No 7406, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Euler equations of consumption are tested on the household consumption of non-durables and services, reconstructed from the CEX database. The estimated relative risk aversion coefficient of the representative household decreases, and the estimated unexplained mean equity premium decreases, as infra marginal asset holders are eliminated from the sample. These results provide evidence of limited capital market participation. The estimated unexplained mean equity premium decreases when the assumption of complete consumption insurance is relaxed. The estimated correlation between the equity premium and the cross- sectional variance of the households' consumption growth is negative, as required, if the relaxation of market completeness is to contribute towards the explanation of the premium. The overall evidence from asset prices in favor of relaxing the assumption of complete consumption insurance is weak. An extensive Monte Carlo investigation highlights the relationship between the economic implications of limited participation and the resulting statistical properties of commonly used test statistics. The simulation results provide direct evidence relating observation error in consumption and the resulting small-sample of the test statistics.

JEL-codes: D91 G12 (search for similar items in EconPapers)
Date: 1999-10
New Economics Papers: this item is included in nep-fin
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Published as Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 793-824, August.

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Working Paper: Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence (2002)
Working Paper: Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence
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