Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence

Posted: 26 Aug 2002

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Christopher Geczy

University of Pennsylvania - The Wharton School, Finance Department

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Abstract

We present evidence that the equity premium and the premium of value stocks over growth stocks are consistent in the 1982-96 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 low value of the RRA coefficient, the evidence supports the hypothesis of incomplete consumption insurance. We also present evidence is 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.

Suggested Citation

Brav, Alon and Constantinides, George M. and Geczy, Christopher Charles, Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence. Journal of Political Economy, Vol. 110, August 2002. Available at SSRN: https://ssrn.com/abstract=318201

Alon Brav

Duke University - Fuqua School of Business ( email )

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George M. Constantinides (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Christopher Charles Geczy

University of Pennsylvania - The Wharton School, Finance Department ( email )

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