Equilibrium Asset Prices with Undiversifiable Labor Income Risk

Philippe Weil

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Abstract: In a two-period Lucas tree economy in which ex ante identical, but ex post dissimilar, agents face undiversifiable labor income risk, calibrating a (wrong) representative agent model results in overstating the equilibrium riskfree rate and in understating the equilibrium equity premium if the utility function exhibits decreasing absolute risk aversion and decreasing absolute prudence. These behavioral assumptions provide, as a consequence, a theoretical rationale for the often advanced conjecture that nontraded risk contributes to the solution of the riskfree rate and equity premium puzzles.

Date: 1992-07
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Published in Journal of Economic Dynamics and Control, 1992, 16 (3-4), pp.769 - 790. ⟨10.1016/0165-1889(92)90057-L⟩

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Journal Article: Equilibrium asset prices with undiversifiable labor income risk (1992)
Working Paper: Equilibrium Asset Prices with Undiversifiable Labor Income Risk (1992)
Working Paper: Equilibrium Asset Prices with Undiversifiable Labor Income Risk (1992)
Working Paper: Equilibrium Asset Prices with Undiversifiable Labor Income Risk (1992)
Working Paper: Equilibrium Asset Prices With Undiversifiable Labor Income Risk (1992)
Working Paper: Equilibrium Asset Prices with Undiversifiable Labor Income Risk (1991)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03393436

DOI: 10.1016/0165-1889(92)90057-L

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