We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models, and to evaluate their performance in pricing aggregate risk. We find that with low risk aversion these models cannot generate a substantial equity premium. On the positive side for high values (over 30) of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer. (JEL: G12, D53, D52, E44) (c) 2008 by the European Economic Association.
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Volume (Year): 6 (2008) Issue (Month): 2-3 (04-05) Pages: 715-726 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Albert Marcet & Ramon Marimon, 1994.
"Recursive Contracts,"
Economics Working Papers
337, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1998.
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