Transcription of Approximate Equilibrium Asset Prices - Philippe Weil
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Approximate Equilibrium Asset Prices - Philippe Weil
Review of Finance (2011) 15: 1 28doi: Access publication: 18 June 2010 Approximate Equilibrium Asset Prices FERNANDO RESTOY1and Philippe WEIL21 Comisi`on Nacional del Mercado de Valores;2 Universit e libre de Bruxelles, Sciences Po and that total consumer wealth is unobservable, we invert the ( Approximate ) con-sumption function to reconstruct, in a world with Kreps-Porteus generalized isoelastic preferences,(i) the wealth that supports the agents observed consumption as an optimal outcome and (ii) therate of return on the consumers wealth portfolio. This allows us to (approximately) price assetssolely as a function of their payoffs and of consumption in both homoskedastic or heteroskedasticenvironments. We compare implied Equilibrium returns on the wealth portfolio to observed stockmarket returns and gauge whether the stock market is a good proxy for unobserved aggregate Classification: E21, G121.
2 FERNANDO RESTOY AND PHILIPPE WEIL consumers, the length of their economic lifetime or the completeness of markets, there must be some link between asset returns and consumption, between prices
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