Disaggregation and the equity premium puzzle

Standard macroeconomic models cannot explain why stocks so greatly outperform bonds. However, this result depends on the use of aggregate consumption data. If markets are incomplete, then a representative agent might not exist and it is necessary to use consumption data at the household rather than aggregate level. In the household data, I fail to reject the Euler equation when the coefficient of relative risk aversion is as low as 2.7-3.8. This result is robust in a very general framework and I prove that many of the tests used in the literature are biased.