Inequality, premium and the timing of resolution of uncertainty

Georgios Koimisis and Christos Giannikos

Finance Research Letters, 2024, vol. 60, issue C

Abstract: We incorporate Epstein-Zin preferences in an exchange economy with income uncertainty and examine the effect of inequality on the equity risk premium. When agents have preference for late resolution of uncertainty, inequality increases the premium for low income uncertainty and decreases the premium for large income uncertainty. When agents have preference for early resolution of uncertainty, inequality increases the equity premium even when the level of income uncertainty is large. Our results suggest that the time preference for resolution of uncertainty has an important effect on income uncertainty, which subsequently affects the relationship of inequality with the equity risk premium.

Keywords: Equity premium; Time preferences; Inequality; Uninsurable idiosyncratic risk (search for similar items in EconPapers)
JEL-codes: D11 D31 G11 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012357

DOI: 10.1016/j.frl.2023.104863

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