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Asset Pricing Implications of Pareto Optimality with Private Information

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Listed author(s):
  • Narayana R. Kocherlakota
  • Luigi Pistaferri

Abstract

We compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained Pareto-optimal allocations. We represent the models' stochastic discount factors in terms of the cross-sectional distribution of consumption and use these representations to evaluate the models' empirical implications. The first model is inconsistent with the equity premium in the United States, United Kingdom, and Italy. The second model is consistent with the equity premium and the risk-free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0.5. (c) 2009 by The University of Chicago. All rights reserved.

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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000508.

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Date of creation: 19 Sep 2004
Handle: RePEc:cla:levrem:122247000000000508
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Find related papers by JEL classification:
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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  1. Kocherlakota: A Puzzle
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-09-27 21:36:00
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