Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data

Posted: 7 Oct 2006

See all articles by Dirk Krueger

Dirk Krueger

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Fabrizio Perri

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

Abstract

We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of the limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints in that state of the world. These unconstrained households have lower consumption growth rates than constrained households, i.e. they are located in the lower tail of the crosssectional consumption growth distribution. We use household consumption data from the U.S. Consumer Expenditure Survey to estimate the pricing kernel implied by the model and to evaluate its performance in pricing aggregate risk. We employ the same data to construct aggregate consumption and to derive the standard complete markets pricing kernel. We find that the limited enforcement pricing kernel generates a market price of risk that is substantially larger than the standard complete markets asset pricing kernel.

Keywords: Limited Commitment, Equity Premium, Stochastic Discount Factor, Household Consumption Data

JEL Classification: G12, D53, D52, E44

Suggested Citation

Krueger, Dirk and Lustig, Hanno N. and Perri, Fabrizio, Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data (September 2006). CFS Working Paper No. 2006/22, Available at SSRN: https://ssrn.com/abstract=935310

Dirk Krueger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6691 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~dkrueger/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Hanno N. Lustig

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fabrizio Perri

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0251 (Phone)
212-995-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~fperri/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
894
PlumX Metrics