Can costs of consumption adjustment explain asset pricing puzzles?

We investigate Grossman and Laroque's (1990) conjecture that costs of adjus ting consumption can account, in part, for the empirical failure of the con sumption-based capital asset pricing model (CCAPM). We incorporate small fi xed costs of consumption adjustment into a CCAPM with heterogeneous agents. We find that undetectably small consumption adjustment costs can account f or much of the discrepancy between the observed variance of nondurable aggr egate consumption growth and the predictions of the CCAPM, and can partiall y reconcile nondurable consumption data with the observed equity premium. W e conclude that the CCAPM's implications are nonrobust to extremely small a djustment costs.