Asset pricing with limited risk sharing and heterogeneous agents
Journal
Review of Financial Studies
Subject
Finance
Publishing details
Authors / Editors
Gomes F;Michaelides A
Biographies
Publication Year
2008
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.
Publication Research Centre
Institute of Finance and Accounting
Available on ECCH
No
