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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 bindoccasionally, and markets that are incomplete. Equilibrium consumption-savings plans and asset pricesare computed under various assumptions about income uncertainty. Then, we investigate whether themodel replicates two empirical observations: the high correlation between individual consumption andindividual income, and the equity premium puzzle. We find that, when the driving processes arecalibrated according to the data from wage incomein different sectors of the U.S. economy, theresults move in the direction of explaining these observations,but we fall short of explaining theobservations quantitatively. If the incomes of agentsare assumed to be independent of each other, theobservations can be explained quantitatively.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 3 (1999)
Issue (Month): 02 (June)
Pages: 243-277

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Handle: RePEc:cup:macdyn:v:3:y:1999:i:02:p:243-277_01

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  1. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
  2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  3. Christopher D. Carroll & Lawrence H. Summers, 1991. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Chapters, in: National Saving and Economic Performance, pages 305-348 National Bureau of Economic Research, Inc.
  4. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. N. Gregory Mankiw, 1986. "The Equity Premium and the Concentration of Aggregate Shocks," NBER Working Papers 1788, National Bureau of Economic Research, Inc.
  6. Gregory N. Mankiw & Stephen P. Zeldes, . "The Consumption of Stockholders and Non-Stockholders (Reprint 015)," Rodney L. White Center for Financial Research Working Papers 23-90, Wharton School Rodney L. White Center for Financial Research.
  7. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
  8. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  9. Taylor, John B & Uhlig, Harald, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 1-17, January.
  10. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
  11. repec:fth:harver:1533 is not listed on IDEAS
  12. Hua He and Neil D. Pearson., 1989. "Consumption and Portfolio Policies with Incomplete Markets and Short-Sale Constraints: The Infinite Dimensional Case," Research Program in Finance Working Papers RPF-191, University of California at Berkeley.
  13. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  14. Albert Marcet & David A. Marshall, 1994. "Solving nonlinear rational expectations models by parameterized expectations: Convergence to stationary solutions," Economics Working Papers 76, Department of Economics and Business, Universitat Pompeu Fabra.
  15. Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 745-81, July.
  16. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  17. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January.
  18. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  19. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, vol. 61(4), pages 929-52, July.
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