I investigate empirically the ability of financial market incompleteness to help explaining the equity premium puzzle. I estimate the non-diversifiable component of the cross-sectional volatility of income and examine its cyclical properties. Equipped with these estimates, I compute the implied equilibrium Sharpe-ratio of excess returns and evaluate the ability of idiosyncratic risk to improve ...

This paper examines the optimal consumption and investment problem for a ‘large’ investor, whose portfolio choices affect the instantaneous expected returns on the traded assets. Alternatively, our analysis can be interpreted in terms of an optimal growth problem with nonlinear technologies. Existence of optimal policies is established using martingale and duality techniques under general assum...

Hyperbolic absolute risk aversion (HARA) utility, (See is a more Carroll and Kimball, 1996), realistic alternative to the power utility used in consumption-based capital asset pricing models (CCAPM). We propose a new estimator for the HARA based on Godambe-Durbin “estimating functions” and small sigma asymptotics (SSA). This is an alternative to the generalized method of moments (GMM). Since th...

Recent evidence indicates the new goods bias in the Consumer Price Index is large and cyclical (Broda and Weinstein, 2010). Because standard theory prices assets by the discounted value of real payoffs, these findings have implications for asset pricing. In this paper, I use the growth of dynamic goods—goods subject to more innovation—as a proxy for the growth of new goods, and include this as ...

The constant relative risk aversion (CRRA) type utility functions are used in consumption-based capital asset pricing models (C-CAPM) and are estimated by the generalized method of moments (GMM). More realistic hyperbolic absolute risk aversion (HARA) utility functions are analytically inconvenient. We show how to estimate HARA-based CCAPM models by employing Godambe-Durbin \estimating function...

Article history: Received 6 September 2011 Accepted 13 February 2012 Available online 8 March 2012 A number of recent papers have developed multifactor extensions of the classic consumption capital asset pricing model (CCAPM) and generally concluded that conditioning information improves the empirical performance. This paper asks whether the superior empirical performance of the multifactor CCA...

We extend the monetary-asset user-cost risk adjustment of Barnett, Liu, and Jensen (1997) and their risk-adjusted Divisia monetary aggregates to the case of multiple non-monetary assets and intertemporal non-separability. Our model can generate potentially larger and more accurate CCAPM user-cost risk adjustments than those found in Barnett, Liu, and Jensen (1997). We show that the risk adjustm...