Market Frictions and Consumption-Based Asset Pricing
Posted: 6 Sep 1999
Date Written: August 1994
A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the co-movements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations MAY (authors emphasis) not be inconsistent with market equilibrium.
JEL Classification: G12
Suggested Citation: Suggested Citation