Finance Papers

Document Type

Journal Article

Date of this Version

2002

Publication Source

Journal of Political Economy

Volume

110

Issue

4

Start Page

793

Last Page

824

DOI

10.1086/340776

Abstract

We present evidence that the equity premium and the premium of value stocks over growth stocks are consistent in the 1982–96 period with a stochastic discount factor calculated as the weighted average of individual households’ marginal rate of substitution with low and economically plausible values of the relative risk aversion coefficient. Since these premia are not explained with an SDF calculated as the per capita marginal rate of substitution with a low value of the RRA coefficient, the evidence supports the hypothesis of incomplete consumption insurance. We also present evidence that an SDF calculated as the per capita marginal rate of substitution is better able to explain the equity premium and does so with a lower value of the RRA coefficient, as the definition of asset holders is tightened to recognize the limited participation of households in the capital market.

Copyright/Permission Statement

© 2002 by The University of Chicago.

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Date Posted: 27 November 2017

This document has been peer reviewed.