Approximate Equilibrium Asset Prices
AbstractArguing that total consumer wealth is unobservable, we invert the (approximate) consumption function to reconstruct, in a world with Kreps-Porteus generalized isoelastic preferences, i) the wealth that supports the agents’ observed consumption as an optimal outcome and ii) the rate of return on the consumers’ wealth portfolio. This allows us to (approximately) price assets solely as a function of their payoffs and of consumption — in both homoskedastic or heteroskedastic environments. We compare implied equilibrium returns on the wealth portfolio to observed stock market returns and gauge whether the stock market is a good proxy for unobserved aggregate wealth.
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Bibliographic InfoPaper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/5l6uh8ogmqildh09h4838ip3n.
Date of creation: Jan 2011
Date of revision:
Publication status: Published in Review of Finance (2011) v. , p.-
Asset pricing; Kreps-Porteus; Epstein-Zin-Weil preferences;
Other versions of this item:
- Fernando Restoy & Philippe Weil, 1998. "Approximate Equilibrium Asset Prices," NBER Working Papers 6611, National Bureau of Economic Research, Inc.
- Fernando Restoy & Philippe Weil, 1998. "Approximate Equilibrium Asset Prices," Sciences Po publications 6611, Sciences Po.
- Fernando Restoy & Philippe Weil, 1995. "Approximate Equilibrium Asset Prices," Banco de Espaï¿½a Working Papers 9515, Banco de Espa�a.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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