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An Empirical Assessment of a Consumption CAPM with a Reference Level under Incomplete Consumption Insurance

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  • Andrei Semenov

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    (Department of Economics, York University)

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    Abstract

    We study asset pricing implications of the preference specification in which an agent derives utility from both the ratio of his consumption to some reference level and this level itself under incomplete consumption insurance and limited asset market participation. Assuming that the reference level responds gradually to changes in aggregate consumption per capita, we show that when asymmetry in individual consumption is taken into account, the obtained estimate of the elasticity of intertemporal substitution is in the conventional range and significantly different from the inverse of the relative risk aversion (RRA) coefficient as the definition of assetholders is tightened. Both the power utility model and the ratio preference specification are rejected statistically.

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    File URL: http://econ.yorku.ca/%7Easemenov/wp2003-12-2.pdf
    File Function: First version, 2003
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    Bibliographic Info

    Paper provided by York University, Department of Economics in its series Working Papers with number 2003_5.

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    Length: 24 pages
    Date of creation: Dec 2003
    Date of revision:
    Handle: RePEc:yca:wpaper:2003_5

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    Related research

    Keywords: incomplete consumption insurance; intertemporal substitution; limited asset market participation; risk aversion;

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    3. Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," NBER Working Papers 8822, National Bureau of Economic Research, Inc.
    4. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    23. Cecchetti, Stephen G & Lam, Pok-sang & Mark, Nelson C, 1990. "Mean Reversion in Equilibrium Asset Prices," American Economic Review, American Economic Association, vol. 80(3), pages 398-418, June.
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