Working Paper: NBER ID: w26607
Authors: Nicolae B. Grleanu; Stavros Panageas
Abstract: We develop a tractable asset-pricing framework characterized by imperfect risk sharing among cohorts, who experience different levels of integrated life-time endowments. While all asset-pricing implications stem from the heterogeneity of consumption among investors, cross-sectional measures of inequality are non-volatile, only weakly related to asset prices, and far more persistent than the price-to-dividend ratio. We show how to identify a marginal agent’s consumption growth in this framework by utilizing cross-sectional information. Our proposed notion of marginal-agent consumption growth exhibits different and more volatile low-frequency variation than the aggregate consumption growth per capita, which is normally used in representative agent models. These low frequency movements in our measure of marginal agent consumption growth can explain a large portion of the low frequency movements in real interest rates and, when combined with recursive preferences, can account quantitatively for the stylized asset-pricing facts (high market price of risk, equity premium, volatility, and return predictability).
Keywords: Asset Pricing; Heterogeneity; Consumption Growth; Marginal Agent
JEL Codes: E21; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| marginal agent consumption growth (E20) | asset prices (G19) |
| marginal agent consumption growth (E20) | real interest rates (E43) |
| aggregate consumption growth (E20) | marginal agent consumption growth (E20) |
| low-frequency variation (E32) | real interest rates (E43) |
| recursive preferences + marginal agent consumption growth (D11) | asset pricing facts (G19) |