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Approximate Equilibrium Asset Prices

Author

Listed:
  • Fernando Restoy
  • Philippe Weil

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

Arguing that total consumer wealth is unobservable, we invert the (approximate) consumption function to reconstruct, in a world with Kreps-Porteus generalized isoelastic preferences, i) the wealth that supports the agents' observed consumption as an optimal outcome and ii) the rate of return on the consumers' wealth portfolio. This allows us to (approximately) price assets solely as a function of their payoffs and of consumption — in both homoskedastic or heteroskedastic environments. We compare implied equilibrium returns on the wealth portfolio to observed stock market returns and gauge whether the stock market is a good proxy for unobserved aggregate wealth.

Suggested Citation

  • Fernando Restoy & Philippe Weil, 2011. "Approximate Equilibrium Asset Prices," SciencePo Working papers Main hal-03415503, HAL.
    • Handle: RePEc:hal:spmain:hal-03415503
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03415503
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    References listed on IDEAS

    as
    1. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
    2. repec:hal:spmain:info:hdl:2441/8686 is not listed on IDEAS
    3. Alberto Giovannini & Philippe Weil, 1989. "Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model," NBER Working Papers 2824, National Bureau of Economic Research, Inc.
    4. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    5. Kocherlakota, Narayana R, 1990. "Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrelevance Result," Journal of Finance, American Finance Association, vol. 45(1), pages 175-190, March.
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    More about this item

    Keywords

    Asset pricing; Kreps-Porteus; Epstein-Zin-Weil preferences;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G0 - Financial Economics - - General

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