TY  - JOUR
AU  - Krueger,Dirk
AU  - Lustig,Hanno
TI  - When is Market Incompleteness Irrelevant for the Price of Aggregate Risk (and when is it not)?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12634
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12634
L1  - http://www.nber.org/papers/w12634.pdf
N1  - Author contact info:
Dirk Krueger
Economics Department
University of Pennsylvania
160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-6691
Fax: 215/573-2057
E-Mail: dkrueger@econ.upenn.edu

Hanno Lustig
UCLA Anderson School of Management
110 Westwood Plaza, Suite C413
Los Angeles, CA 90095-1481
Tel: 310/825-1011
Fax: 310/825-9528
E-Mail: hlustig@anderson.ucla.edu
AB  - 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.
ER  -