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Incomplete consumption risk sharing implies that the market risk premium is high in times of lack of risk sharing and vice versa. In the time period from 1980 to 2007, this implication of incomplete consumption risk sharing for the market price of risk is not mirrored in excess returns on stocks but in returns on real estate both in the Euro Area and in the U.S. This finding thus casts doubt on the common practice to approximate the market return by a stock index return in empirical tests of the Sharpe-Lintner capital asset pricing model. However, cross-sectional asset pricing tests suggest that there are fundamental differences between the Euro Area and the U.S. in this respect.
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