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Approximate equilibrium asset prices

Author: Fernando Restoy; Philippe Weil; National Bureau of Economic Research.
Publisher: Cambridge, MA : National Bureau of Economic Research, 1998.
Series: Working paper series (National Bureau of Economic Research), working paper no. 6611.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
Abstract: This paper reconsiders the determination of asset returns in a model with Kreps-Porteus generalized isoelastic preferences where returns appear governed on the basis of Euler equations, by a combination of the two most common measures of risk -- covariance with the market return and covariance with consumption. To go beyond Euler equations and to take into account the links that the consumers' optimal  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Fernando Restoy; Philippe Weil; National Bureau of Economic Research.
OCLC Number: 70107752
Notes: "June 1998."
Description: 1 online resource (26 pages).
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 6611.
Responsibility: Fernando Restoy and Philippe Weil.

Abstract:

Abstract: This paper reconsiders the determination of asset returns in a model with Kreps-Porteus generalized isoelastic preferences where returns appear governed on the basis of Euler equations, by a combination of the two most common measures of risk -- covariance with the market return and covariance with consumption. To go beyond Euler equations and to take into account the links that the consumers' optimal behavior establishes, through a budge connstraint, between market returns and consumption, we derive an approximate consumption function (obtained, as in Campbell (1994), by log-linear approximation). Arguing that total consumer wealth is unobservable, we use this consumption function to reconstruct from observed consumption data i) the wealth that supports the agents' consumption optimal income, and ii) the rate of retun on the consumers' wealth portfolio. This procedure enables us to derive formulas that (approximately) price, in the tradition of Lucas (1978), all assets as a function of their payoffs and of consumption. The generalized consumption CAPM that we obtain is derived for both homoskedastic and heteroskedastic consumption processes. We also use our approximate pricing kernel to highlight the crucial role of temporal risk aversion in the determination of the equilibrium term structure of real interest rates.

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