Habits, Wealth and Equity Risk Premium

Christos Giannikos and Georgios Koimisis ()

Finance Research Letters, 2021, vol. 38, issue C

Abstract: We investigate how external habits affect the equity risk premium in an exchange economy with identical agents, except for their initial endowment. Wealth inequality is introduced with a mean-preserving transfer of endowment. We show that, when external habits are present and the absolute risk tolerance of agents is convex (concave), wealth inequality will decrease (increase) the equity risk premium. Furthermore, we find that as external habits increase, the equity risk premium increases (decreases) if agents exhibit convex (concave) absolute risk tolerance.

Keywords: asset prices; wealth inequality; habit formation (search for similar items in EconPapers)
JEL-codes: D11 D31 D63 G11 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:38:y:2021:i:c:s1544612319302090

DOI: 10.1016/j.frl.2020.101518

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