Distribution Risk and Equity Returns

Jean-Pierre Danthine (), John B. Donaldson and Paolo Siconolfi

Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) from Université de Lausanne, Faculté des HEC, DEEP

Abstract: In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labor relations. We show that this view implies that income share variations represent a risk factor of ¯rst-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks.

Keywords: income shares; distribution risk; equity premium; limited market participation (search for similar items in EconPapers)
JEL-codes: E3 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-fin and nep-fmk
Date: Written 2005-11
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Related works:
Working Paper: Distribution Risk and Equity Returns (2005)
Working Paper: Distribution Risk and Equity Returns (2005)
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