Approximate Equilibrium Asset Prices

Fernando Restoy, Philippe Weil

NBER Working Paper No. 6611
Issued in June 1998
NBER Program(s):Asset Pricing

This paper reconsiders the determination of asset returns in a model with Kreps-Porteus generalized isoelastic preferences where returns appear governed on the basis of Euler equations, by a combination of the two most common measures of risk -- covariance with the market return and covariance with consumption. To go beyond Euler equations and to take into account the links that the consumers' optimal behavior establishes, through a budge connstraint, between market returns and consumption, we derive an approximate consumption function (obtained, as in Campbell (1994), by log-linear approximation). Arguing that total consumer wealth is unobservable, we use this consumption function to reconstruct from observed consumption data i) the wealth that supports the agents' consumption optimal income, and ii) the rate of retun on the consumers' wealth portfolio. This procedure enables us to derive formulas that (approximately) price, in the tradition of Lucas (1978), all assets as a function of their payoffs and of consumption. The generalized consumption CAPM that we obtain is derived for both homoskedastic and heteroskedastic consumption processes. We also use our approximate pricing kernel to highlight the crucial role of temporal risk aversion in the determination of the equilibrium term structure of real interest rates.

download in pdf format
   (860 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6611

Published: Fernando Restoy & Philippe Weil, 2011. "Approximate Equilibrium Asset Prices," Review of Finance, European Finance Association, vol. 15(1), pages 1-28. citation courtesy of

Users who downloaded this paper also downloaded* these:
Lichtenberg w6601 The Allocation of Publicly-Funded Biomedical Research
Bagwell and Staiger w6604 The Simple Economics of Labor Standards and the GATT
Glaeser, Kessler, and Piehl w6602 What Do Prosecutors Maximize? An Analysis of Drug Offenders and Concurrent Jurisdiction
Bernanke and Mihov w6608 The Liquidity Effect and Long-Run Neutrality
Athey and Stern w6595 The Adoption and Impact of Advanced Emergency Response Services
NBER Videos

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

Contact Us