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Asset pricing with limited risk sharing and heterogeneous agents

Gomes, Francisco and Michaelides, Alexander (2008) Asset pricing with limited risk sharing and heterogeneous agents. Review of Financial Studies, 21 (1). pp. 415-448. ISSN 0893-9454

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Identification Number: 10.1093/rfs/hhm063

Abstract

We develop 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 aggregate uncertainty, borrowing constraints, and a (realistically) calibrated life-cycle earnings profile subject to idiosyncratic shocks. We show that it is challenging to simultaneously match asset pricing moments and individual portfolio decisions, while limited participation has a negligible impact on the risk-premium, contrary to the results of models where it is imposed exogenously.

Item Type: Article
Official URL: http://rfs.oxfordjournals.org
Additional Information: © 2007 the author
Subjects: H Social Sciences > HB Economic Theory
JEL classification: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Departments > Economics
Date Deposited: 12 May 2008 13:22
Last Modified: 02 Nov 2017 15:36
URI: http://eprints.lse.ac.uk/id/eprint/4820

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