TY - JOUR
AU - Restoy,Fernando
AU - Weil,Philippe
TI - Approximate Equilibrium Asset Prices
JF - National Bureau of Economic Research Working Paper Series
VL - No. 6611
PY - 1998
Y2 - June 1998
DO - 10.3386/w6611
UR - http://www.nber.org/papers/w6611
L1 - http://www.nber.org/papers/w6611.pdf
N1 - Author contact info:
Philippe Weil
Director, Universite Libre de Bruxelles
ECARES
50, Avenue Roosevelt CP 114
B-1050 Brussels BELGIUM
Tel: 32-2-650-4220
Fax: 32-2-650-4475
E-Mail: philippe.weil@ulb.ac.be
AB - 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.
ER -