Idiosyncratic risk and the equity premium

Andrés Carvajal and Hang Zhou

Journal of Mathematical Economics, 2024, vol. 113, issue C

Abstract: This paper aims to further our understanding of the effect of idiosyncratic risk on the equity premium. We consider different classes of preferences and different co-variations between the idiosyncratic shocks’ variance and the economy’s aggregate income. We offer a complete characterization of the effect for short-lived assets relying on the cross-moments of different utility function derivatives and the economy’s aggregate income. We also study the effects of higher-order moments of the distribution of idiosyncratic risk.

Keywords: Equity premium; Idiosyncratic risk; Higher-order risk aversion (search for similar items in EconPapers)
JEL-codes: D01 D50 D53 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:113:y:2024:i:c:s0304406824000740

DOI: 10.1016/j.jmateco.2024.103014

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