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Asset Pricing Implications of Pareto Optimality with Private Information

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Author Info
Narayana Kocherlakota
Luigi Pistaferri

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Abstract

We compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained Pareto-optimal allocations. We represent the models' stochastic discount factors in terms of the cross-sectional distribution of consumption and use these representations to evaluate the models' empirical implications. The first model is inconsistent with the equity premium in the United States, United Kingdom, and Italy. The second model is consistent with the equity premium and the risk-free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0.5. (c) 2009 by The University of Chicago. All rights reserved..

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File URL: http://www.journals.uchicago.edu/doi/pdf/10.1086/599761
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 117 (2009)
Issue (Month): 3 (06)
Pages: 555-590
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Handle: RePEc:ucp:jpolec:v:117:y:2009:i:3:p:555-590

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Cited by:
(explanations, 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.)

  1. Dirk Krueger & Hanno Lustig & Fabrizio Perri, 2007. "Evaluating Asset Pricing Models with Limited Commitment using Household Consumption Data," NBER Working Papers 13650, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Hanno Lustig, 2004. "The Market Price of Aggregate Risk and the Wealth Distribution," UCLA Economics Online Papers 299, UCLA Department of Economics. [Downloadable!]
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  3. Kollmann, Robert, 2009. "Household Heterogeneity and the Real Exchange Rate: Still a Puzzle," CEPR Discussion Papers 7301, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Parantap Basu & Andrei Semenovz & Kenji Wadax, 2007. " Uninsurable Risk and Financial Market Puzzles," CDMA Conference Paper Series 0701, Centre for Dynamic Macroeconomic Analysis. [Downloadable!]
  5. YiLi Chien & Harold Cole & Hanno Lustig, 2007. "A Multiplier Approach to Understanding the Macro Implications of Household Finance," NBER Working Papers 13555, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Kocherlakota, Narayana & Pistaferri, Luigi, 2007. "Household Heterogeneity and Real Exchange Rates," CEPR Discussion Papers 6192, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Kevin X. D. Huang & Zheng Liu & Qi Zhu, 2006. "Temptation and self-control: some evidence and applications," Staff Report 367, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  8. Andrei Semenov, 2003. "High-Order Consumption Moments and Asset Pricing," Working Papers 2003_4, York University, Department of Economics, revised Jan 2005. [Downloadable!]
  9. Andrei Semenov, 2008. "Estimation of the consumption CAPM with imperfect sample separation information," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 333-348. [Downloadable!]
  10. Noah Williams, 2008. "Persistent Private Information," NBER Working Papers 13894, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Dirk Krueger & Hanno Lustig & Fabrizio Perri, 2006. "Taxing Capital? Not a Bad Idea After All!," CFS Working Paper Series 2006/22, Center for Financial Studies. [Downloadable!]
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