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Incomplete Markets and Security Prices: Do Asset‐Pricing Puzzles Result from Aggregation Problems?
Author(s) -
Jacobs Kris
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00100
Subject(s) - complement (music) , asset (computer security) , incomplete markets , capital asset pricing model , consumption (sociology) , economics , consumption based capital asset pricing model , econometrics , empirical evidence , microeconomics , mathematical economics , arbitrage pricing theory , financial economics , computer science , complementation , sociology , gene , social science , biochemistry , chemistry , philosophy , computer security , epistemology , phenotype
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.