Asset Pricing Implications of Pareto Optimality with Private Information

By Narayana Kocherlakota, Luigi Pistaferri. Journal of Political Economy, 2009

114 citations recorded by the source corpus.

We compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained Pareto‐optimal allocations. We represent the models’ stochastic discount factors in terms of the cross‐sectional distribution of consumption and use these representations to evaluate the models’ empirical implications. The first model is inconsistent with the equity premium in the United States, United Kingdom, and Italy. The second model is consistent with the equity premium and the risk‐free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0.5.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/8ee2433ba2fb2418c8d99f85b0dda6a5eea088ab

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Citations in the corpus

Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy (2010, unknown): “Kocherlakota and Pistaferri (2009), whose paper we discuss in Section 5, is an example.”
The Nature of Countercyclical Income Risk (2014, background): “…have argued that it is the countercyclical left-skewness of shocks that is critical instead ðMankiw 1986; Brav, Constantinides, and Geczy 2002; Kocherlakota and Pistaferri 2009Þ. Recent papers that study the Great Recession of 2007–9 now routinely use countercyclical risk as one of the key…”