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High-Order Consumption Moments and Asset Pricing

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  • Andrei Semenov

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    (Department of Economics, York University)

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    Abstract

    This paper develops an approximate equilibrium factor model for asset returns. In this model, the pricing factors are the cross-moments of return with the cross-sectional moments of individual consumption and the signs of the risk factor coefficients are driven by preference assumptions. Using household-level quarterly consumption data from the U.S. Consumer Expenditure Survey, we find that this model explains the observed equity premium with an economically realistic value of risk aversion when the stochastic discount factor is expressed in terms of the cross-sectional skewness and kurtosis, in addition to the mean and variance, of individual consumption.

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    File URL: http://econ.yorku.ca/%7Easemenov/wp2003-12-1.pdf
    File Function: Revised version, 2005
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    Bibliographic Info

    Paper provided by York University, Department of Economics in its series Working Papers with number 2003_4.

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    Length: 40 pages
    Date of creation: Dec 2003
    Date of revision: Jan 2005
    Handle: RePEc:yca:wpaper:2003_4

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    Keywords: asset pricing; equity premium; Euler equation; heterogeneous consumers; incomplete consumption insurance.;

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    References

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    Cited by:
    1. Balduzzi, Pierluigi & Yao, Tong, 2007. "Testing heterogeneous-agent models: an alternative aggregation approach," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 369-412, March.

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