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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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  • Albert Marcet
  • Kenneth J. Singleton

Abstract

We study the quantitative properties of a dynamic general equilibrium model in which agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bind in some but not all periods and markets are incomplete. Optimal individual consumption -savings plans and equilibrium asset prices are computed under various assumptions about income uncertainty. Then we investigate whether our general equilibrium model with incomplete markets replicates two empirical observations: the high correlation between individual consumption and individual income, and the equity premium puzzle. We find that, when the driving processes are calibrated according to the data from wage income in different sectors of the US economy, the results move in the direction of explaining these observations, but the model falls short of explaining the observed correlations quantitatively. If the incomes of agents are assumed independent of each other, the observations can be explained quantitatively.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 319.

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Date of creation: Apr 1990
Date of revision: Jul 1998
Handle: RePEc:upf:upfgen:319

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Web page: http://www.econ.upf.edu/

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Keywords: Incomplete markets; credit constraints; equity premium puzzle; consumption volatility; simulation;

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  1. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  2. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, Econometric Society, vol. 50(2), pages 461-81, March.
  3. N. Gregory Mankiw, 1986. "The Equity Premium and the Concentration of Aggregate Shocks," NBER Working Papers 1788, National Bureau of Economic Research, Inc.
  4. Albert Marcet & David A. Marshall, 1994. "Solving nonlinear rational expectations models by parameterized expectations: convergence to stationary solutions," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 94-20, Federal Reserve Bank of Chicago.
  5. Gregory N. Mankiw & Stephen P. Zeldes, . "The Consumption of Stockholders and Non-Stockholders (Reprint 015)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 23-90, Wharton School Rodney L. White Center for Financial Research.
  6. repec:fth:harver:1533 is not listed on IDEAS
  7. Hua He and Neil D. Pearson., 1989. "Consumption and Portfolio Policies with Incomplete Markets and Short-Sale Constraints: The Finite Dimensional Case," Research Program in Finance Working Papers, University of California at Berkeley RPF-189, University of California at Berkeley.
  8. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 21(1), pages 9-46, January.
  9. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
  10. 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.
  11. N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
  12. 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, American Statistical Association, vol. 8(1), pages 1-17, January.
  13. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(3), pages 401-421, November.
  14. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 16-88, Wharton School Rodney L. White Center for Financial Research.
  15. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  16. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 929-52, July.
  17. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  18. 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, Elsevier, vol. 18(1), pages 83-114, January.
  19. Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, Econometric Society, vol. 62(4), pages 745-81, July.
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