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Heterogeneity in Financial Market Participation: Appraising its Implications for the C-CAPM

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  • Monica Paiella

Abstract

This paper presents empirical evidence that accounting for heterogeneity in financial market participation is important for evaluating the empirical performance of the Consumption-based Capital Asset Pricing Model (C-CAPM). Using the U.S. Consumer Expenditure Survey as a common testing ground, I re-assess three well-known characterizations of the 'equity premium puzzle': (i) the inconsistency of the representative agent's IMRS with Hansen and Jagannathan bounds; (ii) Mehra and Prescott's calibration of a large representative agent's risk aversion; (iii) Hansen and the Singleton's large structural estimates of the preference parameters based on aggregate data. In all three cases, the estimates of risk aversion conditional upon financial market participation are not as far from reasonable values as the corresponding unconditional ones. The differences suggest that part of the 'equity premium puzzle' can be accounted for by the use of a 'representative agent' assumption rather than a more appropriate 'representative stockholding agent' assumption. Copyright 2004, Oxford University Press.

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File URL: http://hdl.handle.net/10.1007/s10679-004-2545-x
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Bibliographic Info

Article provided by Springer in its journal Review of Finance.

Volume (Year): 8 (2004)
Issue (Month): 3 ()
Pages: 445-480

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Handle: RePEc:kap:eurfin:v:8:y:2004:i:3:p:445-480

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Web page: http://springerlink.metapress.com/link.asp?id=111870

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Cited by:
  1. Luigi Guiso & Tullio Jappelli, 2003. "Awareness and Stock Market Participation," CSEF Working Papers 110, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jun 2004.
  2. Orazio P. Attanasio & Monica Paiella, 2011. "Intertemporal consumption choices, transaction costs and limited participation in financial markets: reconciling data and theory," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 322-343, March.

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