Evaluation asset pricing models with limited commitment using household consumption data

Dirk Krueger, Hanno Lustig and Fabrizio Perri

No 2006/22, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of the limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints in that state of the world. These unconstrained households have lower consumption growth rates than constrained households, i.e. they are located in the lower tail of the crosssectional consumption growth distribution. We use household consumption data from the U.S. Consumer Expenditure Survey to estimate the pricing kernel implied by the model and to evaluate its performance in pricing aggregate risk. We employ the same data to construct aggregate consumption and to derive the standard complete markets pricing kernel. We find that the limited enforcement pricing kernel generates a market price of risk that is substantially larger than the standard complete markets asset pricing kernel.

Keywords: Limited Commitment; Equity Premium; Stochastic Discount Factor; Household Consumption Data (search for similar items in EconPapers)
JEL-codes: D52 D53 E44 G12 (search for similar items in EconPapers)
Date: 2006
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Related works:
Journal Article: Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data (2008)
Working Paper: Evaluating Asset Pricing Models with Limited Commitment using Household Consumption Data (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200622

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