Asset Pricing with Heterogeneous Consumers

J. OF POLITICAL ECONOMY, Vol. 104 No. 2, April 1996

Posted: 28 Jun 1998

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Abstract

Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks. Given the joint process of arbitrage-free asset prices, dividends, and aggregate income, satisfying a certain joint restriction, it is shown that this process is supported in the equilibrium of an economy with judiciously modeled income heterogeneity. The Euler equations of consumption in a representative-agent economy are replaced by a set of Euler equations that depend not only on the per capita consumption growth but also on the cross-sectional variance of the individual consumers' consumption growth.

JEL Classification: G12

Suggested Citation

Constantinides, George M. and Duffie, James Darrell, Asset Pricing with Heterogeneous Consumers. J. OF POLITICAL ECONOMY, Vol. 104 No. 2, April 1996, Available at SSRN: https://ssrn.com/abstract=7366

George M. Constantinides (Contact Author)

University of Chicago - Booth School of Business ( email )

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James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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Canadian Derivatives Institute ( email )

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