Consumption-Based Asset Pricing: Durable Goods, Adjustment Costs, and Aggregation

51 Pages Posted: 13 May 2004 Last revised: 23 Oct 2012

See all articles by Stephan Siegel

Stephan Siegel

University of Washington - Michael G. Foster School of Business; CESifo

Date Written: October 1, 2008

Abstract

In this paper, we investigate the implications of non-separable preferences over durable and nondurable consumption for asset pricing tests when adjusting durable consumption is costly. In an economy without adjustment costs, in which a frictionless rental market exists for the durable good, the standard Euler equation with respect to nondurable consumption will hold for each individual agent as well as for aggregate data. If the adjustment of the durable good is costly, however, aggregation generally fails. We use aggregate data to find substantial deviations from the frictionless model, consistent with the presence of non-convex adjustment costs for the durable good. We also show how empirical asset pricing tests that use aggregate data can be affected by these deviations. We then propose and implement asset pricing tests that are robust to the presence of adjustment costs by relying on microeconomic data. Using household-level observations of nondurable food and durable housing consumption, our estimation results suggest that preferences are indeed non-separable in the two consumption goods and that reasonable structural parameters characterize agents' intertemporal utility optimizations.

Keywords: Asset pricing, durable goods, aggregation

JEL Classification: D92, G13, E22

Suggested Citation

Siegel, Stephan, Consumption-Based Asset Pricing: Durable Goods, Adjustment Costs, and Aggregation (October 1, 2008). Available at SSRN: https://ssrn.com/abstract=545882 or http://dx.doi.org/10.2139/ssrn.545882

Stephan Siegel (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://faculty.washington.edu/ss1110/

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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