Evaluating Asset Pricing Models with Limited Commitment using Household Consumption Data

Dirk Krueger, Hanno Lustig, Fabrizio Perri

NBER Working Paper No. 13650
Issued in November 2007
NBER Program(s):   AP    EFG

---- Abstract -----

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.

Would you like an annual subscription to NBER Working Papers? Click here for more information.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.
Information for subscribers and others expecting no-cost downloads

Machine-readable bibliographic record - MARC, RIS, BibTeX

 

 
Publications:
Main Publications Page
 
New This Week
Working Papers
Books              
Books in Progress
Older Books Online
Digest            
Reporter            
Bulletin on Aging & Health
Historical Bulletins
Free Subscriptions
Paid Subscriptions
 
Research:
Program descriptions and members
 
Working Group Descriptions and Papers
 
Selected Projects:
Conference on Research in Income and Wealth
Conference on Econometrics and Mathematical Economics
Sloan Science and Engineering Workforce Project
Boston Census Research Data Center
 
Call for Papers
Submit to WP Series             
 
Data:
NBER Collection
Business Cycle Dates
Latest Business Cycle Memo
New Economic Releases
Selected Sources
Current Population Survey
Economic Organizations
US Government Agencies
Other Data Collections

Economic Report of the President
Economic Indicators
Congressional Budget Office
OECD Frequently Requested Statistics
 
About
What we are
Contact us
Non-data Links    
Search              
Site Map
Help              
Employment              
Fellowships
Early History
 
People:
Staff
Researchers
Board
Contact Us
Search
 
Search via Google: