Working Paper: NBER ID: w13650
Authors: Dirk Krueger; Hanno Lustig; Fabrizio Perri
Abstract: We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of 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. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.
Keywords: Asset Pricing; Limited Commitment; Household Consumption; Equity Premium
JEL Codes: D52; D53; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited enforcement of intertemporal contracts (D86) | asset pricing kernel (G19) |
| consumption growth rates of unconstrained households (D12) | asset pricing kernel (G19) |
| unconstrained households (D10) | lower consumption growth rates compared to constrained households (D12) |
| limited enforcement pricing kernel (D45) | market price of risk (G19) |
| limited enforcement pricing kernel (D45) | equity premium (G12) |