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Cited by 363

The DOI matches its Crossref record; 25 of the 25 references it cites were found in a registry or an index.

A Parsimonious Macroeconomic Model for Asset Pricing

·2009·Econometrica
DOI 10.3982/ecta6658
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Abstract

I study asset prices in a two-agent macroeconomic model with two key features: limited stock market participation and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices, such as a high equity premium, relatively smooth interest rates, procyclical stock prices, and countercyclical variation in the equity premium, its volatility, and in the Sharpe ratio. In this model, the risk-free asset market plays a central role by allowing non-stockholders (with low EIS) to smooth the fluctuations in their labor income. This process concentrates non-stockholders' labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the U.S. data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model's ability to generate a countercyclical equity premium. When it comes to business cycle performance, the model's progress has been more limited: consumption is still too volatile compared to the data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.

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Metadata

Venue
Econometrica
Publisher
The Econometric Society
Published
2009
Volume
77
Issue
6
Pages
1711-1750
ISSN
0012-9682 (ISSN-L)
DOI
10.3982/ecta6658
OpenAlex
W3122829894
Cited by
363
References
25
FWCI
55.47
Type
journal article
Language
en
Open access
closed

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