Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing

John Heaton and Deborah Lucas

Journal of Political Economy, 1996, vol. 104, issue 3, 443-87

Abstract: The authors examine an economy with aggregate and idiosyncratic income risk in which agents cannot contract on future labor income. Agents trade financial securities to buffer idiosyncratic shocks but the extent of trade is limited by borrowing constraints and transactions costs. The effect of frictions on the equity premium is decomposed into two components: a direct effect due to the equation of net-of-costs margins and an indirect effect due to increased consumption volatility. Simulations suggest that the direct effect dominates and that the model predicts a sizable equity premium only if costs are large or the quantity of tradable assets is limited. Copyright 1996 by University of Chicago Press.

Date: 1996
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (564)

Downloads: (external link)
http://dx.doi.org/10.1086/262030 full text (application/pdf)
Access to full text is restricted to subscribers. See http://www.journals.uchicago.edu/JPE for details.

Related works:
Working Paper: Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing (1993)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:104:y:1996:i:3:p:443-87

Access Statistics for this article

More articles in Journal of Political Economy from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().