Equity premium under multiple background risks

Yoichiro Fujii () and Yutaka Nakamura
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Yoichiro Fujii: Graduate School of Systems and Information Engineering, University of Tsukuba

Economics Bulletin, 2010, vol. 30, issue 2, 933-939

Abstract: In a static Lucas's tree economy, we explore the effect of two types of background risk, uninsurable risk for labor income and miscalibrated risk for payoff distribution of risky asset, on the equilibrium price of the risky asset. Then we analyze the data of U.S. stock market and GDP growth rates during 1871-2004 to verify that our simple static model could provide appropriate magnitudes of equity premium.

Keywords: equity premium; static Lucas model; background risk; equilibrium price (search for similar items in EconPapers)
JEL-codes: D5 E2 (search for similar items in EconPapers)
Date: 2010-04-01
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