Equity Premium with Habits, Wealth Inequality and Background Risk

Christos Giannikos and Georgios Koimisis ()

JRFM, 2021, vol. 14, issue 7, 1-15

Abstract: In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth inequality will increase or decrease the equity premium even when the income uncertainty is low. This result extends literature by suggesting that wealth inequality has a small role in explaining asset pricing puzzles.

Keywords: asset prices; wealth inequality; habits; background risk (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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