Journal article
Testing heterogeneous-agent models: an alternative aggregation approach
Journal of monetary economics, Vol.54(2), pp.369-412
03/01/2007
DOI: 10.1016/j.jmoneco.2005.08.021
Abstract
Starting from the cross-sectional aggregation of marginal utilities, rather than intertemporal marginal rates of substitution, this paper develops a new heterogeneous-agent pricing kernel. A closed-form version of the new kernel depends on changes in the cross-sectional variance of log consumption, rather than the variance of changes in log consumption, as in Constantinides and Duffie [1996. Asset pricing with heterogeneous consumers. Journal of Political Economy 104, 219–237]. We implement the new kernel on household consumption data from the Consumer Expenditure Survey (CEX). At monthly and quarterly horizons, the new kernel reconciles the premium on U.S. equities with the consumption of asset holders, for reasonable values of relative risk aversion. The new kernel also fares better than kernels based on the aggregation of intertemporal marginal rates of substitution in explaining the cross-sectional variation of risk premia on stocks and bonds. Portfolios mimicking changes in the cross-sectional variance of log consumption for asset holders command significant negative Sharpe ratios.
Details
- Title: Subtitle
- Testing heterogeneous-agent models: an alternative aggregation approach
- Creators
- Pierluigi Balduzzi - Boston CollegeTong Yao - University of Arizona
- Resource Type
- Journal article
- Publication Details
- Journal of monetary economics, Vol.54(2), pp.369-412
- Publisher
- Elsevier B.V
- DOI
- 10.1016/j.jmoneco.2005.08.021
- ISSN
- 0304-3932
- eISSN
- 1873-1295
- Language
- English
- Date published
- 03/01/2007
- Academic Unit
- Finance
- Record Identifier
- 9984380514702771
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