NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence

Alon Brav, George M. Constantinides, Christopher C. Geczy

NBER Working Paper No. 8822
Issued in March 2002
NBER Program(s):   AP

We present evidence that the equity premium and the premium of value stocks over growth stocks are explained in the 1982 1996 period with a stochastic discount factor (SDF) calculated as the weighted average of individual households' marginal rate of substitution with low and economically plausible values of the relative risk aversion (RRA) coefficient. Household consumption of non-durables and services is reconstructed from the CEX database. Since the above premia are not explained with a SDF calculated as the per capita marginal rate of substitution with low value of the RRA coefficient, the evidence supports the hypothesis of incomplete consumption insurance. We also present evidence is that a SDF calculated as the per capita marginal rate of substitution is better able to explain the equity premium and does so with a lower value of the RRA coefficient, as the definition of asset holders is tightened to recognize the limited participation of households in the capital market.

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Document Object Identifier (DOI): 10.3386/w8822

Published: Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 793-824, August.

This paper is a revision of the earlier NBER working paper w7406, Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence, Alon Brav, George M. Constantinides, Christopher C. Geczy
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