Consumption-Based Asset Pricing with Recursive Utility

Consumption-Based Asset Pricing with Incomplete Markets

This paper shows that consumption-based asset pricing theory imposes no testable restrictions on either macroeconomic or cross-sectional data if one allows for uninsurable idiosyncratic income shocks which are persistent and not normally distributed. More precisely, this paper shows that any “observed” joint process of arbitrage-free asset prices and payoffs, aggregate consumption, and moments ...

Consumption-Based Asset Pricing with Higher Cumulants

I extend the Epstein-Zin-lognormal consumption-based asset-pricing model to allow for general i.i.d. consumption growth processes. Information about the higher moments—equivalently, cumulants—of consumption growth is encoded in the cumulantgenerating function (CGF). I express four observable quantities (the equity premium, riskless rate, consumption-wealth ratio and mean consumption growth) and...

Consumption-Based Asset Pricing Models

A major research initiative in finance focuses on the determinants of the cross-sectional and time series properties of asset returns. With that objective in mind, asset pricing models have been developed, starting with the capital asset pricing models of Sharpe (1964), Lintner (1965), andMossin (1966). Consumption-based asset pricing models use marginal rates of substitution to determine the r...

The Consumption - Based Capital Asset Pricing Model

Arrow-Debreu Existence Result Let K be a normed vector lattice with positive cone K+ (see Schaefer (1974)). We consider an Arrow-Debreu (pure exchange) economy 9'= (?, e') in K, with m agents described by preference relations > i on K+ and initial endowments e' E K+. Throughout, we make the usual assumptions on preferences: each >i is reflexive, transitive, complete, convex, continuous, and str...

Asset Pricing with Stochastic Differential Utility

Consumption and Asset Prices with Recursive Preferences

We analyze consumption and asset pricing with recursive preferences given by Kreps–Porteus stochastic differential utility (K–P SDU). We show that utility depends on two state variables: current consumption and a second variable (related to the wealth–consumption ratio) that captures all information about future opportunities. This representation of utility reduces the internal consistency cond...