Abstract

http://ssrn.com/abstract=941134
 
 

References (27)



 
 

Citations (12)



 


 



Testing Heterogeneous-Agent Models: An Alternative Aggregation Approach


Pierluigi Balduzzi


Boston College - Carroll School of Management

Tong Yao


University of Iowa - Henry B. Tippie College of Business


Journal of Monetary Economics, Forthcoming

Abstract:     
Starting from the cross-sectional aggregation of marginal utilities, rather than intertemporal marginal rates of substitution, this paper develops a new heterogeneous-agent pricing kernel. A closed-form version of the new kernel depends on changes in the cross-sectional variance of log consumption, rather than the variance of changes in log consumption, as in Constantinides and Duffie (1996). We implement the new kernel on household consumption data from the Consumer Expenditure Survey (CEX). At monthly and quarterly horizons, the new kernel reconciles the premium on U.S. equities with the consumption of asset holders, for reasonable values of relative risk aversion. The new kernel also fares better than kernels based on the aggregation of intertemporal marginal rates of substitution in explaining the cross-sectional variation of risk premia on stocks and bonds. Portfolios mimicking changes in the cross-sectional variance of log consumption for asset holders command significant negative Sharpe ratios.

Number of Pages in PDF File: 54

Keywords: pricing kernel, heterogeneity

JEL Classification: G12

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Date posted: November 1, 2006  

Suggested Citation

Balduzzi, Pierluigi and Yao, Tong, Testing Heterogeneous-Agent Models: An Alternative Aggregation Approach. Journal of Monetary Economics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=941134

Contact Information

Pierluigi Balduzzi (Contact Author)
Boston College - Carroll School of Management ( email )
Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)
HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/
Tong Yao
University of Iowa - Henry B. Tippie College of Business ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
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References:  27
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