Incomplete Markets and Security Prices: Do Asset‐Pricing Puzzles Result from Aggregation Problems?

  • Author(s): Kris Jacobs
  • Published: May 06, 2003
  • Pages: 123-163
  • DOI: 10.1111/0022-1082.00100

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.

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