02481cam a22002657 4500001000600000003000500006005001700011008004100028100002200069245009900091260006600190490004100256500001500297520134800312530006101660538007201721538003601793690012901829690005601958700002002014710004202034830007602076856003702152856002602189w6611NBER20140722112543.0140722s1998 mau||||fs|||| 000 0 eng d1 aRestoy, Fernando.10aApproximate Equilibrium Asset Pricesh[electronic resource] /cFernando Restoy, Philippe Weil. aCambridge, Mass.bNational Bureau of Economic Researchc1998.1 aNBER working paper seriesvno. w6611 aJune 1998.3 aThis 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. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy2Journal of Economic Literature class. 7aG0 - General2Journal of Economic Literature class.1 aWeil, Philippe.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w6611.4 uhttp://www.nber.org/papers/w6611 uurn:doi:10.3386/w6611