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Equilibrium Asset Prices And Savings Of Heterogeneous Agents In The Presence Of Incomplete Markets And Portfolio Constraints

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  • Marcet, Albert
  • Singleton, Kenneth J.

Abstract

We study the quantitative properties of a dynamic general equilibrium model. Agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bind occasionally, and markets that are incomplete. Equilibrium consumption-savings plans and asset prices are computed under various assumptions about income uncertainty. Then, we investigate whether the model replicates two empirical observations: the high correlation between individual consumption and individual income, and the equity premium puzzle. We find that, when the driving processes are calibrated according to the data from wage income in different sectors of the U.S. economy, the results move in the direction of explaining these observations, but we fall short of explaining the observations quantitatively. If the incomes of agents are assumed to be independent of each other, the observations can be explained quantitatively.

Suggested Citation

  • Marcet, Albert & Singleton, Kenneth J., 1999. "Equilibrium Asset Prices And Savings Of Heterogeneous Agents In The Presence Of Incomplete Markets And Portfolio Constraints," Macroeconomic Dynamics, Cambridge University Press, vol. 3(2), pages 243-277, June.
    • Handle: RePEc:cup:macdyn:v:3:y:1999:i:02:p:243-277_01
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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