Evaluating Asset Pricing Models with Limited Commitment using Household Consumption Data

Dirk Krueger, Hanno Lustig and Fabrizio Perri

No 13650, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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 evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.

JEL-codes: D52 D53 E44 G12 (search for similar items in EconPapers)
Date: 2007-11
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP EFG
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Citations: View citations in EconPapers (1)

Published as Dirk Krueger & Hanno Lustig & Fabrizio Perri, 2008. "Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 715-726, 04-05.

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Journal Article: Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data (2008)
Working Paper: Evaluation asset pricing models with limited commitment using household consumption data (2006)
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