The Equity Premium and the One Percent

Alexis Akira Toda, Kieran James Walsh and Stijn Van Nieuwerburgh

The Review of Financial Studies, 2020, vol. 33, issue 8, 3583-3623

Abstract: We show that in a general equilibrium model with heterogeneity in risk aversion or belief, shifting wealth from an agent who holds comparatively fewer stocks to one who holds more reduces the equity premium. From an empirical view, the rich hold more stocks, so inequality should predict excess stock market returns. Consistent with our theory, we find that when the U.S. top (, 1%) income share rises, subsequent 1-year excess market returns significantly decline. This negative relation is robust to controlling for classic return predictors, predicting out-of-sample, and instrumenting inequality with estate tax rate changes. It also holds in international markets.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Date: 2020
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