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Asset Pricing With Heterogeneous Consumers: When The Data Has Yet To Meet A Theory It Likes

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Executive Summary

The authors present empirical evidence that uninsurable idiosyncratic consumption risk cannot explain the magnitude of the equity premium. Using Consumer Expenditure Survey data set on household consumption from 1984 to 2002, they examine the cross-sectional distribution of consumption growth and its relation to stock returns. They document that cross-sectional moments of household consumption growth have little covariance with aggregate market returns. Furthermore, they construct representative cohorts based on education, age and income and estimate cohort-based conditional Euler equations. Their model is tested via GMM and rejected when they use both cohort-based measures of intertemporal marginal rate of substitution and tighten the definition of asset holders.

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