Asset Pricing with Limited Risk Sharing and Heterogeneous Agents

Francisco Gomes () and Alexander Michaelides

No 6136, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We solve 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: equity premium; incomplete risk sharing; life-cycle models; limited stock market participation; preference heterogeneity (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-fmk
Date: Written
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Journal Article: Asset Pricing with Limited Risk Sharing and Heterogeneous Agents (2008)
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