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The authors use novel clustering approach and local Taylor series approximations of the stochastic discount factor to examine the role of heterogeneity in asset pricing. They present evidence that the equity premium is consistent with a stochastic discount factor calculated as the weighted average of the clusters' intertemporal marginal rates of substitution in the 1984-2002 periods. This result is driven by the skewness of the cross-sectional distribution of consumption growth, but cannot be explained by the cross-sectional variance and mean alone. They show that the result is sensitive to the construction of clusters as well as the number of the clusters used in the paper.
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