Gomes, Francisco and Michaelides, Alexander (2005) Asset pricing with limited risk sharing and heterogeneous agents. Financial Markets Group Discussion Papers (537). Financial Markets Group, The London School of Economics and Political Science, London, UK.
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Abstract
We solve a model with incomplete markets and heterogeneous agents that generates a large equity premium, while simultaneously matching stock market participation and individual asset holdings. The high risk premium is driven by incomplete risk sharing among stockholders, which results from the combination of borrowing constraints and (realistically) calibrated life-cycle earnings profiles, subject to both aggregate and idiosyncratic shocks. We show that it is challenging to simultaneously match aggregate quantities (asset prices) and individual quantities (asset allocations). Furthermore, limited participation has a negligible impact on the risk premium, contrary to the results of models where it is imposed exogenously.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | http://fmg.ac.uk |
| Additional Information: | © 2005 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 > G11 - Portfolio Choice; Investment Decisions E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth |
| Date Deposited: | 29 Jul 2009 11:49 |
| Last Modified: | 11 Dec 2024 18:41 |
| URI: | http://eprints.lse.ac.uk/id/eprint/24649 |
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