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Title: Limited participation in the joint behavior of asset prices and individual consumptions Authors:  Veronika Czellar - EDHEC (France) [presenting]
Francois Le Grand - EMLyon Business School (France)
Rene Garcia - EDHEC Business School (France)
Abstract: We propose an asset pricing model featuring both limited participation and heterogeneity, in which agents randomly participate in the bond and stock markets. Depending on their financial market participation, agents are endowed with different consumption processes, which satisfy Euler conditions for both bonds and stocks. We propose an indirect inference method to jointly estimate individual consumption, bond and stock market participation processes, and stock returns. We use individual US consumption (CEX), bond and stock return data. Our estimated model performs very well at jointly replicating the equity premium and the unequal distribution of individual consumptions. We find that our estimation is consistent with endogenous bond market participation and with a non-zero stock market participation cost. We show that the role of limited market participation is necessary to match the heterogeneity in individual consumptions, while unlimited participation leads to very inaccurate replications of consumption and return distributions.