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Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence

  • Alon Brav
  • George M. Constantinides
  • Christopher C. Geczy

We present evidence that the equity premium and the premium of value stocks over growth stocks are consistent in the 198296 period with a stochastic discount factor calculated as the weighted average of individual households' marginal rate of substitution with low and economically plausible values of the relative risk aversion coefficient. Since these premia are not explained with an SDF calculated as the per capita marginal rate of substitution with a low value of the RRA coefficient, the evidence supports the hypothesis of incomplete consumption insurance. We also present evidence that an SDF calculated as the per capita marginal rate of substitution is better able to explain the equity premium and does so with a lower value of the RRA coefficient, as the definition of asset holders is tightened to recognize the limited participation of households in the capital market.

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Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 23-99.

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Handle: RePEc:fth:pennfi:23-99
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