Asset pricing with heterogeneous consumers and limited participation: Empirical evidence

Published

Journal Article

We present evidence that the equity premium and the premium of value stocks over growth stocks are consistent in the 1982-96 period with a stochastic discount factor calculated as the weighted average of individual households' marginal rate of substitution with low and economically plausible values of the relative risk aversion coefficient. Since these premia are not explained with an SDF calculated as the per capita marginal rate of substitution with a low value of the RRA coefficient, the evidence supports the hypothesis of incomplete consumption insurance. We also present evidence that an 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.

Full Text

Duke Authors

Cited Authors

  • Brav, A; Constantinides, GM; Geczy, CC

Published Date

  • August 1, 2002

Published In

Volume / Issue

  • 110 / 4

Start / End Page

  • 793 - 824

International Standard Serial Number (ISSN)

  • 0022-3808

Digital Object Identifier (DOI)

  • 10.1086/340776

Citation Source

  • Scopus