Approximate Equilibrium Asset Prices - Sciences Po Access content directly
Preprints, Working Papers, ... Year : 1998

Approximate Equilibrium Asset Prices


This paper reconsiders the determination of asset returns in a model with Kreps-Porteus generalized isoelastic preferences where returns appear governed on the basis of Euler equations, by a combination of the two most common measures of risk -- covariance with the market return and covariance with consumption. To go beyond Euler equations and to take into account the links that the consumers' optimal behavior establishes, through a budge connstraint, between market returns and consumption, we derive an approximate consumption function (obtained, as in Campbell (1994), by log-linear approximation). Arguing that total consumer wealth is unobservable, we use this consumption function to reconstruct from observed consumption data i) the wealth that supports the agents' consumption optimal income, and ii) the rate of retun on the consumers' wealth portfolio. This procedure enables us to derive formulas that (approximately) price, in the tradition of Lucas (1978), all assets as a function of their payoffs and of consumption. The generalized consumption CAPM that we obtain is derived for both homoskedastic and heteroskedastic consumption processes. We also use our approximate pricing kernel to highlight the crucial role of temporal risk aversion in the determination of the equilibrium term structure of real interest rates.
Fichier principal
Vignette du fichier
w6611.pdf (859.1 Ko) Télécharger le fichier
Origin : Files produced by the author(s)

Dates and versions

hal-03462464 , version 1 (01-12-2021)


  • HAL Id : hal-03462464 , version 1
  • SCIENCESPO : 2441/8644


Fernando Restoy, Philippe Weil. Approximate Equilibrium Asset Prices. 1998. ⟨hal-03462464⟩
16 View
10 Download


Gmail Facebook X LinkedIn More