Type
Article
Title
Approximate Equilibrium Asset Prices
In
Review of Finance
Author(s)
Editor
GB : Oxford University Press
Volume
15
Number
1
Pages
1 - 28 p.
ISSN
15723097
Keywords
Asset pricing, Kreps-Porteus, Epstein-Zin-Weil preferences
Abstract
EN
Arguing that total consumer wealth is unobservable, we invert the (approximate) consumption function to reconstruct, in a world with Kreps-Porteus generalized isoelastic preferences, i) the wealth that supports the agents’ observed consumption as an optimal outcome and ii) the rate of return on the consumers’ wealth portfolio. This allows us to (approximately) price assets solely as a function of their payoffs and of consumption — in both homoskedastic or heteroskedastic environments. We compare implied equilibrium returns on the wealth portfolio to observed stock market returns and gauge whether the stock market is a good proxy for unobserved aggregate wealth.

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