Evaluating Asset Pricing Models with Limited Commitment using Household Consumption Data / Dirk Krueger, Hanno Lustig, Fabrizio Perri.

Format:

Book

Author/Creator:

Krueger, Dirk.

Contributor:

National Bureau of Economic Research.

Lustig, Hanno.

Perri, Fabrizio.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13650.

NBER working paper series no. w13650

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of 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. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.

Notes:

Print version record

November 2007.