TY - JOUR AU - Brav,Alon AU - Constantinides,George M. AU - Geczy,Christopher C. TI - Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence JF - National Bureau of Economic Research Working Paper Series VL - No. 7406 PY - 1999 Y2 - October 1999 UR - http://www.nber.org/papers/w7406 L1 - http://www.nber.org/papers/w7406.pdf N1 - Author contact info: Alon Brav Fuqua School of Business Duke University One Towerview Drive Durham, NC 27708 Tel: 919/660-2908 Fax: 919/684-2818 E-Mail: brav@duke.edu George M. Constantinides The University of Chicago Booth School of Business 5807 South Woodlawn Avenue Chicago, IL 60637 Tel: 773/702-7258 Fax: 773/753-8045 (773) 753-8045 E-Mail: gmc@ChicagoBooth.edu Christopher Geczy Finance Department Wharton School University of Pennsylvania 3620 Locust Walk, SH-DH Philadelphia, PA 19096-6367 E-Mail: geczy@wharton.upenn.edu AB - The Euler equations of consumption are tested on the household consumption of non-durables and services, reconstructed from the CEX database. The estimated relative risk aversion coefficient of the representative household decreases, and the estimated unexplained mean equity premium decreases, as infra marginal asset holders are eliminated from the sample. These results provide evidence of limited capital market participation. The estimated unexplained mean equity premium decreases when the assumption of complete consumption insurance is relaxed. The estimated correlation between the equity premium and the cross- sectional variance of the households' consumption growth is negative, as required, if the relaxation of market completeness is to contribute towards the explanation of the premium. The overall evidence from asset prices in favor of relaxing the assumption of complete consumption insurance is weak. An extensive Monte Carlo investigation highlights the relationship between the economic implications of limited participation and the resulting statistical properties of commonly used test statistics. The simulation results provide direct evidence relating observation error in consumption and the resulting small-sample of the test statistics. ER -