Gomes, Francisco and Michaelides, Alexander (2005) Asset pricing with limited risk sharing and heterogeneous agents. Discussion paper: UBS Pensions Series 035, 537. Financial Markets Group, London School of Economics and Political Science, London, UK.
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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)|
|Additional Information:||© 2005 The Authors|
|Uncontrolled Keywords:||Equity premium, Preference heterogeneity, Incomplete risk sharing, Life-cycle models, Limited stock market participation.|
|Library of Congress subject classification:||H Social Sciences > HF Commerce
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
|Journal of Economic Literature Classification System:||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
|Sets:||Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
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