Campbell, John Y. and Nosbusch, Yves (2007) Intergenerational risksharing and equilibrium asset prices. Financial Markets Group Discussion Papers (589). Financial Markets Group, The London School of Economics and Political Science, London, UK.
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Abstract
In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital.
| Item Type: | Monograph (Discussion Paper) |
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| Official URL: | http://fmg.ac.uk |
| Additional Information: | © 2007 The Authors |
| Divisions: | Financial Markets Group |
| Subjects: | H Social Sciences > HF Commerce H Social Sciences > HG Finance H Social Sciences > HB Economic Theory |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates |
| Date Deposited: | 22 Jul 2009 08:27 |
| Last Modified: | 11 Dec 2024 18:49 |
| URI: | http://eprints.lse.ac.uk/id/eprint/24484 |
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