Asset Pricing with Limited Risk Sharing and Heterogeneous Agents
Top Cited Papers
- 13 November 2007
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 21 (1) , 415-448
- https://doi.org/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.Keywords
This publication has 47 references indexed in Scilit:
- Portfolio Choice over the Life‐Cycle when the Stock and Labor Markets Are CointegratedThe Journal of Finance, 2007
- Entry costs and stock market participation over the life cycleReview of Economic Dynamics, 2006
- Financial Innovation, Market Participation, and Asset PricesJournal of Financial and Quantitative Analysis, 2004
- Risks for the Long Run: A Potential Resolution of Asset Pricing PuzzlesThe Journal of Finance, 2004
- Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical EvidenceJournal of Political Economy, 2002
- The Effects of Investing Social Security Funds in the Stock Market When Fixed Costs Prevent Some Households from Holding StocksAmerican Economic Review, 2001
- Habit Persistence, Asset Returns, and the Business CycleAmerican Economic Review, 2001
- An Equilibrium Model with Restricted Stock Market ParticipationThe Review of Financial Studies, 1998
- Precautionary portfolio behavior from a life-cycle perspectiveJournal of Economic Dynamics and Control, 1997
- Asset returns with transactions costs and uninsured individual riskJournal of Monetary Economics, 1991