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Aggregation, Liquidity, and Asset Prices with Incomplete Markets

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Listed:
  • Sebastian Di Tella
  • Benjamin M. Hébert
  • Pablo Kurlat

Abstract

We analytically characterize asset-pricing and consumption behavior in two-account heterogeneous-agent models with aggregate risk. We show that trading frictions can simultaneously explain (1) household-level consumption behavior such as high marginal propensities to consume, (2) a zero-beta rate on equities that satisfies an aggregate consumption Euler equation, (3) a return on safe assets that does not, and (4) a flat securities market line. The return of equities is well explained by aggregate consumption, while the return of safe assets reflects a large and volatile liquidity premium.

Suggested Citation

  • Sebastian Di Tella & Benjamin M. Hébert & Pablo Kurlat, 2024. "Aggregation, Liquidity, and Asset Prices with Incomplete Markets," NBER Working Papers 32268, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32268
    Note: AP EFG
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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