Transcription of Approximate Equilibrium Asset Prices - Philippe Weil
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Approximate Equilibrium Asset Prices - Philippe Weil
Review of Finance (2011) 15: 1 28. doi: Advance Access publication: 18 June 2010. Approximate Equilibrium Asset Prices . FERNANDO RESTOY1 and Philippe WEIL2. Downloaded from at Fondation Nationale Des Sciences Politiques on December 13, 2011. 1. Comisi`on Nacional del Mercado de Valores; 2 Universit e libre de Bruxelles, Sciences Po and CEPR. Abstract. Arguing 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) the rate of return on the consumers' wealth portfolio. This allows us to (approximately) price assets solely as a function of their payoffs and of consumption in both homoskedastic or heteroskedastic environments. We compare implied Equilibrium returns on the wealth portfolio to observed stock market returns and gauge whether the stock market is a good proxy for unobserved aggregate wealth.
APPROXIMATE ASSET PRICES 3 function of consumption data. These reconstructed wealth returns can then be used to calculate an (approximate) pricing kernel which, because it is in turn also solely
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