Consumption-Based Asset Pricing with Incomplete Markets

  title={Consumption-Based Asset Pricing with Incomplete Markets},
  author={Tom Krebs},
This paper shows that consumption-based asset pricing theory imposes no testable restrictions on either macroeconomic or cross-sectional data if one allows for uninsurable idiosyncratic income shocks which are persistent and not normally distributed. More precisely, this paper shows that any “observed” joint process of arbitrage-free asset prices and payoffs, aggregate consumption, and moments of the cross-sectional distribution of consumption (income) growth is an equilibrium outcome for some… CONTINUE READING

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