ABSTRACT This article presents general conditions under which it is possible to obtain asset pricing relations from the intertemporal optimal investment decision of the firm. Under the assumption of linear homogeneous production and adjustment cost functions (the Hayashi (1982) conditions), it is possible to establish, state by state, the equality between the return on investment and the market return of the financial claims issued by the firm. This result proves to be, in essence, robust to the consideration of very general constraints on investment and the inclusion of taxes.

Arguing that total consumer wealth is unobservable, we invert the (approximate) consumption function to reconstruct, in a world with Kreps-Porteus generalized isoelastic preferences, (i) the wealth that supports the agents' observed consumption as an optimal outcome and (ii) the rate of return on the consumers' wealth portfolio. This allows us to (approximately) price assets solely as a function of their payoffs and of consumption—in both homoskedastic or heteroskedastic environments. We compare implied equilibrium returns on the wealth portfolio to observed stock market returns and gauge whether the stock market is a good proxy for unobserved aggregate wealth.