NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

When is Market Incompleteness Irrelevant for the Price of Aggregate Risk (and when is it not)?

Dirk Krueger, Hanno Lustig

NBER Working Paper No. 12634
Issued in October 2006
NBER Program(s):   AP   EFG

In a standard incomplete markets model with a continuum of households that have constant relative risk aversion (CRRA) preferences, the absence of insurance markets for idiosyncratic labor income risk has no effect on the premium for aggregate risk if the distribution of idiosyncratic risk is independent of aggregate shocks and aggregate consumption growth is independent over time. In the equilibrium, which features trade and binding solvency constraints, as opposed to Constantinides and Duffie (1996), households only use the stock market to smooth consumption; the bond market is inoperative. Furthermore we show that the cross-sectional wealth and consumption distributions are not affected by aggregate shocks. These results hold regardless of the persistence of idiosyncratic shocks, and arise even when households face tight solvency constraints, but only a weaker irrelevance result survives when we allow for predictability in aggregate consumption growth.

download in pdf format
   (516 K)

email paper

This paper is available as PDF (516 K) or via email.

An online appendix is available for this publication.

This paper was revised on July 20, 2009

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w12634

Published: Krueger, Dirk & Lustig, Hanno, 2010. "When is market incompleteness irrelevant for the price of aggregate risk (and when is it not)?," Journal of Economic Theory, Elsevier, vol. 145(1), pages 1-41, January. citation courtesy of

Users who downloaded this paper also downloaded these:
Piazzesi and Schneider w12609 Equilibrium Yield Curves
Hilt and O'Banion w14412 The Limited Partnership in New York, 1822-1853: Partnerships without Kinship
Case and Paxson w12466 Stature and Status: Height, Ability, and Labor Market Outcomes
Edmonds and Pavcnik w10317 International Trade and Child Labor: Cross-Country Evidence
Cochrane and Piazzesi w9178 Bond Risk Premia
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us