TY - JOUR
T1 - The equity premium and the allocation of income risk
AU - Danthine, Jean Pierre
AU - Donaldson, John B.
AU - Mehra, Rajnish
N1 - Funding Information:
*Computing resources were generously provided by the Center for the Study of Futures Markets, Columbia University. Financial support from the Faculty Research Fund, Graduate School of Business, Columbia University and the Fonds National de la Recherche Scientifique is gratefully acknowledged.
PY - 1992
Y1 - 1992
N2 - This paper examines the extent to which the equity premium puzzle can be resolved by taking account of the fact that stockholders bear a disproportionate share of output uncertainty. We do this in the context of a non-Walrasian RBC model where risk reallocation is justified by borrowing restrictions. The risk shifting mechanism we propose has the same effect as would arise from an increase in the risk aversion parameter of the representative agent and thus contributes to a rise in the equity premium. As with more standard RBC models, it remains that our model is unable to replicate key financial statistics. In particular, the observation that the equity return is more variable than national product cannot be accounted for under standard technology assumptions.
AB - This paper examines the extent to which the equity premium puzzle can be resolved by taking account of the fact that stockholders bear a disproportionate share of output uncertainty. We do this in the context of a non-Walrasian RBC model where risk reallocation is justified by borrowing restrictions. The risk shifting mechanism we propose has the same effect as would arise from an increase in the risk aversion parameter of the representative agent and thus contributes to a rise in the equity premium. As with more standard RBC models, it remains that our model is unable to replicate key financial statistics. In particular, the observation that the equity return is more variable than national product cannot be accounted for under standard technology assumptions.
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U2 - 10.1016/0165-1889(92)90047-I
DO - 10.1016/0165-1889(92)90047-I
M3 - Article
AN - SCOPUS:38249011376
SN - 0165-1889
VL - 16
SP - 509
EP - 532
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
IS - 3-4
ER -