Advanced Search
MyIDEAS: Login to save this paper or follow this series

Asset pricing implications of Pareto optimality with private information

Contents:

Author Info

  • Kocherlakota, Narayana R.
  • Pistaferri, Luigi

Abstract

In this paper, we consider a dynamic economy in which the agents in the economy are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. We consider an asset pricing equilibrium in which equilibrium quantities are constrained Pareto optimal. Under the assumption that agents have constant relative risk aversion, we derive a novel asset pricing kernel for financial asset returns. The kernel equals the reciprocal of the gross growth of the γth moment of the consumption distribution, where – is the coefficient of relative risk aversion. We use data from the consumer expenditure survey (CEX) and show that the new stochastic discount factor performs better than existing stochastic discount factors at rationalizing the equity premium. However, its ability to simultaneously explain the equity premium and the expected return to the Treasury bill is about the same as existing discount factors. --

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://econstor.eu/bitstream/10419/19614/1/200529dkp.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2005,29.

as in new window
Length:
Date of creation: 2005
Date of revision:
Handle: RePEc:zbw:bubdp1:4223

Contact details of provider:
Postal: Postfach 10 06 02, 60006 Frankfurt
Phone: 0 69 / 95 66 - 34 55
Fax: 0 69 / 95 66 30 77
Email:
Web page: http://www.bundesbank.de/
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
  2. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  3. Altug, Sumru & Miller, Robert A, 1990. "Household Choices in Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 58(3), pages 543-70, May.
  4. Phelan, Christopher, 1994. "Incentives, insurance, and the variability of consumption and leisure," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(3-4), pages 581-599.
  5. Ravi Jagannathan & Zhenyu Wang, 1996. "The conditional CAPM and the cross-section of expected returns," Staff Report, Federal Reserve Bank of Minneapolis 208, Federal Reserve Bank of Minneapolis.
  6. Andrei Semenov, 2004. "High-Order Consumption Moments and Asset Pricing," 2004 Meeting Papers, Society for Economic Dynamics 334, Society for Economic Dynamics.
  7. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
  8. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
  9. Orazio Attanasio & Steven J. Davis, 1994. "Relative Wage Movements and the Distribution of Consumption," NBER Working Papers 4771, National Bureau of Economic Research, Inc.
  10. Audrey Light & Kathleen McGarry, 2004. "Why Parents Play Favorites: Explanations for Unequal Bequests," American Economic Review, American Economic Association, American Economic Association, vol. 94(5), pages 1669-1681, December.
  11. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2001. "How Important Are Idiosyncratic Shocks? Evidence from Labor Supply," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 413-417, May.
  12. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(2), pages 219-40, April.
  13. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing Specification Errors in Stochastic Discount Factor Models," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0153, National Bureau of Economic Research, Inc.
  14. Balduzzi, Pierluigi & Yao, Tong, 2007. "Testing heterogeneous-agent models: an alternative aggregation approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(2), pages 369-412, March.
  15. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  16. Meghir, Costas & Pistaferri, Luigi, 2002. "Income Variance Dynamics and Heterogeneity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3632, C.E.P.R. Discussion Papers.
  17. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," Levine's Working Paper Archive 391749000000000449, David K. Levine.
  18. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(4), pages 825-853, August.
  19. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers, University of Iowa, Department of Economics 95-05, University of Iowa, Department of Economics.
  20. Orazio Attanasio & James Banks & Sarah Tanner, 1998. "Asset Holding and Consumption Volatility," NBER Working Papers 6567, National Bureau of Economic Research, Inc.
  21. Phelan, J.C., 1990. "Incentives, Insurance And The Variability Of Con Somption And Leisure," Working papers, Wisconsin Madison - Social Systems 90-26, Wisconsin Madison - Social Systems.
  22. McGarry, K & Schoeni, R-F, 1996. "Measurement and the Redistribution of Resources Within the Family," Papers, RAND - Reprint Series 96-11, RAND - Reprint Series.
  23. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  24. Ligon, Ethan, 2005. "Formal Markets and Informal Insurance," International Review of Law and Economics, Elsevier, Elsevier, vol. 25(1), pages 75-88, March.
  25. Christopher R. Bollinger & Amitabh Chandra, 2003. "Iatrogenic Specification Error: A Cautionary Tale of Cleaning Data," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0289, National Bureau of Economic Research, Inc.
  26. Atkeson Andrew & Lucas Jr. , Robert E., 1995. "Efficiency and Equality in a Simple Model of Efficient Unemployment Insurance," Journal of Economic Theory, Elsevier, Elsevier, vol. 66(1), pages 64-88, June.
  27. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 23-90, Wharton School - Weiss Center for International Financial Research.
  28. Kocherlakota, Narayana R., 1998. "The effects of moral hazard on asset prices when financial markets are complete," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(1), pages 39-56, February.
  29. Hanno Lustig, 2001. "The Market Price of Aggregate Risk and the Wealth Distribution," Finance, EconWPA 0111004, EconWPA, revised 16 Nov 2001.
  30. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 957-76, October.
  31. Orazio Attanasio & Erich Battistin & Hidehiko Ichimura, 2004. "What Really Happened to Consumption Inequality in the US?," NBER Working Papers 10338, National Bureau of Economic Research, Inc.
  32. Cogley, Timothy, 2002. "Idiosyncratic risk and the equity premium: evidence from the consumer expenditure survey," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(2), pages 309-334, March.
  33. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 53(1), pages 69-76, January.
  34. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  35. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  36. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  37. Ligon, Ethan, 1996. "Risk-Sharing and Information: Theory and Measurement in Village Economies," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt0mx075dh, Department of Agricultural & Resource Economics, UC Berkeley.
  38. Ligon, Ethan, 1998. "Risk Sharing and Information in Village Economics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(4), pages 847-64, October.
  39. Andrei Semenov, 2004. "High-Order Consumption Moments and Asset Pricing," Econometric Society 2004 North American Winter Meetings, Econometric Society 130, Econometric Society.
  40. Kocherlakota, Narayana R., 1990. "On tests of representative consumer asset pricing models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 26(2), pages 285-304, October.
  41. Phelan, Christopher & Townsend, Robert M, 1991. "Computing Multi-period, Information-Constrained Optima," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(5), pages 853-81, October.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Kocherlakota: A Puzzle
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-09-27 21:36:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is featured on the following reading lists or Wikipedia pages:
  1. Asset Pricing Implications of Pareto Optimality with Private Information (JPE 2009) in ReplicationWiki

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:zbw:bubdp1:4223. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.