Incomplete Markets and Security Prices: Do Asset-Pricing Puzzles Result from Aggregation Problems?
Article first published online: 6 MAY 2003
The American Finance Association 1999
The Journal of Finance
Volume 54, Issue 1, pages 123–163, February 1999
How to Cite
Jacobs, K. (1999), Incomplete Markets and Security Prices: Do Asset-Pricing Puzzles Result from Aggregation Problems?. The Journal of Finance, 54: 123–163. doi: 10.1111/0022-1082.00100
- Issue published online: 6 MAY 2003
- Article first published online: 6 MAY 2003
This paper investigates Euler equations involving security prices and household-level consumption data. It provides a useful complement to many existing studies of consumption-based asset pricing models that use a representative-agent framework, because the Euler equations under investigation hold even if markets are incomplete. It also provides a useful complement to simulation-based studies of market incompleteness. The empirical evidence indicates that the theory is rejected by the data along several dimensions. The results therefore indicate that some well-documented asset-pricing puzzles do not result from aggregation problems for the preferences under investigation.