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Title:Evaluation asset pricing models with limited commitment using household consumption data PDF Logo
Authors:Krueger, Dirk
Lustig, Hanno
Perri, Fabrizio
Issue Date:2006
Series/Report no.:CFS Working Paper 2006/22
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.
Subjects:Limited Commitment
Equity Premium
Stochastic Discount Factor
Household Consumption Data
JEL:G12
D53
D52
E44
Persistent Identifier of the first edition:urn:nbn:de:hebis:30-33285
Document Type:Working Paper
Appears in Collections:CFS Working Paper Series, Universität Frankfurt a. M.

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