This paper looks at the empirical consequences of inappropriately using a representative firm to mimic the aggregate investment decisions of a group of heterogeneous firms faced with costs of adjusting capital inputs. Improper aggregation generates a bias with two important consequences: (1) an apparent insensitivity of the aggregate capital stock to the user cost of capital and (2) predicted responses of the capital stock to shocks that are considerably slower than observed. Both of these consequences are features of available investment equations. Copyright 1992 by MIT Press.

This paper develops a consumption-based asset pricing model in which attitudes towards risk are contingent upon the state of the world. For a low (high) level of consumption relative to a subjective metric, counter-cyclical (pro-cyclical) risk aversion implies that consumption shocks generate larger fluctuations in marginal utility, against which the agent will hedge in choosing his optimal portfolio. Asset prices are studied using two-state Markov preference regimes where bull and bear markets reflect alternating periods of low and high risk aversion. Joint estimation of bond and stock prices highlights moderate and infrequent movements in risk aversion, and a marked improvement on the model's ability to capture the cyclical nature of observed asset prices. Resume: Ce papier developpe un modele d'agent representatif de valorisation des actifs dans lequel les preferences sont contingentes a l'etat du monde. Lorsque la consommation est basse (elevee) par rapport a un niveau subjectif, une aversion contra- (pro-) cyclique implique que des chocs a la consommation se traduisent par des fluctuations accentuees de l'utilite marginale que l'agent desirera lisser lors de son choix du portefeuille optimal. Les prix des actifs sont etudies dans le cadre d'un modele markovien a deux etats ou les marches haussiers ou baissiers refletent des periodes alternatives de basse et de haute aversion pour le risque. L'estimation conjointe des prix des bons et des actions mettent en evidence des mouvements moderes et peu frequents dans l'aversion au risque ainsi qu'une amelioration nette du modele en ce qui a trait aux mouvements cycliques des prix.(This abstract was borrowed from another version of this item.)