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EQUILIBRIUM ASSET PRICES AND SAVINGS OF HETEROGENEOUS AGENTS IN THE PRESENCE OF INCOMPLETE MARKETS AND PORTFOLIO CONSTRAINTS

Published online by Cambridge University Press:  02 March 2001

Albert Marcet
Affiliation:
Universitat Pompeu Fabra and Center for Economic Policy Research
Kenneth J. Singleton
Affiliation:
Stanford University and National Bureau of Economic Research

Abstract

We study the quantitative properties of a dynamic general equilibrium model. Agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bindoccasionally, and markets that are incomplete. Equilibrium consumption-savings plans and asset pricesare computed under various assumptions about income uncertainty. Then, we investigate whether themodel replicates two empirical observations: the high correlation between individual consumption andindividual income, and the equity premium puzzle. We find that, when the driving processes arecalibrated according to the data from wage incomein different sectors of the U.S. economy, theresults move in the direction of explaining these observations,but we fall short of explaining theobservations quantitatively. If the incomes of agentsare assumed to be independent of each other, theobservations can be explained quantitatively.

Information

Type
VINTAGE ARTICLE
Copyright
© 1999 Cambridge University Press

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