Market Frictions and Consumption-Based Asset Pricing
AbstractA fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution. Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, the authors examine whether market frictions can explain previous findings. Their results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between intertemporal marginal rates of substitution so that the apparent violations may not be inconsistent with market equilibrium. Copyright 1995 by University of Chicago Press.
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Bibliographic InfoPaper provided by University of California at Berkeley in its series Research Program in Finance Working Papers with number RPF-223.
Date of creation: 01 Jul 1992
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Other versions of this item:
- He, Hua & Modest, David M, 1995. "Market Frictions and Consumption-Based Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 94-117, February.
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