Quantitative asset pricing implications of endogenous solvency constraints

We study the asset pricing implications of an economy where solvency constr aints are endogenously determined to deter agents from defaulting while all owing as much risk sharing as possible. We solve analytically for efficient allocations and for the corresponding asset prices, portfolio holdings, an d solvency constraints for a simple example. Then we calibrate a more gener al model to U.S. aggregate as well as idiosyncratic income processes. We fi nd equity premia, risk premia for long-term bonds, and Sharpe ratios of mag nitudes similar to the U.S. data for low risk aversion and a low time-disco unt factor.