Evaluating asset pricing models with limited commitment using household consumption data

  • 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. Klassifizierung: G12, D53, D52, E44

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Author:Dirk KruegerORCiDGND, Hanno Lustig, Fabrizio Perri
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2006,22
Series (Serial Number):CFS working paper series (2006, 22)
Document Type:Working Paper
Year of Completion:2006
Year of first Publication:2006
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2006/11/18
Tag:Equity Premium; Household Consumption Data; Limited Commitment; Stochastic Discount Factor
GND Keyword:USA; Privater Verbrauch; Asset-Backed Security
Issue:September 2006
Page Number:17
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht