Abstract :
An extensiveempiricalliteraturefindsthatmicroassetmarketsaresegmentedfrom
one another.Wedevelopaconsumption-basedassetpricingmodeltoquantifythe
aggregateimplicationsofafinancialsystemcomprisedofmanysuchsegmentedmicro
assetmarkets.Wespecifyexogenouslythelevelofsegmentationthatdetermineshow
much idiosyncraticrisktradersbearintheirmicromarketandcalibratethesegmenta-
tion tomatchfactsaboutsystematicandidiosyncraticreturnvolatility.Inourbench-
markmodeltradersbear30%oftheiridiosyncraticrisk,theunconditionalaggregate
equitypremiumis2.4%annual,andthewelfarecostsofsegmentationaresubstantial,
1.8% oflifetimeconsumption
