The Role of Heterogeneity in Asset Pricing: The Effect of a Clustering Approach
In this article we use a novel clustering approach to study the role of heterogeneity in asset pricing. We present evidence that the equity premium is consistent with a stochastic discount factor (SDF) calculated as the average of the household clusters’ intertemporal marginal rates of substitution in the 1984--2002 period. The result is driven by the skewness of the cluster-based cross-sectional distribution of consumption growth, but cannot be explained by the cross-sectional variance and mean alone. We find that nine clusters are sufficient to explain the equity premium with relative risk aversion coefficient equal to six. The result is robust to various averaging schemes of cluster-based consumption growth used to construct the SDF. Lastly, the analysis reveals that standard approximation schemes of the SDF using individual household data produce unreliable results, implying a negative SDF.
Year of publication: |
2012
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Authors: | Grishchenko, Olesya V. ; Rossi, Marco |
Published in: |
Journal of Business & Economic Statistics. - Taylor & Francis Journals, ISSN 0735-0015. - Vol. 30.2012, 2, p. 297-311
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Publisher: |
Taylor & Francis Journals |
Saved in:
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