Limited Participation in the Joint Behavior of Asset Prices and Individual Consumptions

54 Pages Posted: 24 Aug 2017

See all articles by Veronika Czellar

Veronika Czellar

EDHEC Business School - Department of Data Science, Economics and Finance

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

Francois Le Grand

EMLYON Business School

Date Written: August 22, 2017

Abstract

We propose an asset pricing model featuring both limited participation and heterogeneity, in which agents randomly participate in the bond and stock markets according to a probability that depends on their non-financial income. We develop an indirect inference method to estimate our model on individual US consumption (CEX) and financial data. Our estimated model performs very well at jointly replicating the equity premium and the unequal distribution of individual consumptions. As an external validity check, our model accurately predicts the estimated stock market participation cost and its decline over the period 1980-2004, as well as observed financial market participation.

Keywords: limited participation, heterogeneity, indirect inference, individual consumption distribution

JEL Classification: G12, C51, E21

Suggested Citation

Czellar, Veronika and Garcia, René and Le Grand, François, Limited Participation in the Joint Behavior of Asset Prices and Individual Consumptions (August 22, 2017). Available at SSRN: https://ssrn.com/abstract=3023862 or http://dx.doi.org/10.2139/ssrn.3023862

Veronika Czellar

EDHEC Business School - Department of Data Science, Economics and Finance ( email )

24, avenue Gustave Delory
Roubaix, 59057
France

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

François Le Grand (Contact Author)

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

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