Approximate equilibrium asset prices

Resumen

This paper reconsiders the determination of asset returns in a model with Kreps-Porteus generalized isoelastic preferences where returns seem governed, if one only looks at Euler equations, by a combination of the two most common measures of risk-covariance with the market return and covariance with consumption. Following Campbell (1994), we go beyond Euler equations, and derive an approximate consumption function in order to explicitly take into account the links that the consumers' optimal behavior establishes between market returns and consumption. Arguing that wealth is essentially unobservable, we use this consumption function to eliminate the rate of return on wealth from our approximate asset pricing formulas, and show that asset returns are determined by a generalized consumption CAPM that prices any asset as a function of its conditional covariances with current and future consumption. This generalized consumption CAPM is derived for homoskedastic and heteroskedastic consumption processes, and is applied, to illustrate the role of temporal risk aversion, to the equilibrium term structure of real interest rates.