Asset pricing with limited risk sharing and heterogeneous agents

Francisco Gomes and Alexander Michaelides

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We solve a model with incomplete markets and heterogeneous agents that generates a large equity premium, while simultaneously matching stock market participation and individual asset holdings. The high risk premium is driven by incomplete risk sharing among stockholders, which results from the combination of borrowing constraints and (realistically) calibrated life-cycle earnings profiles, subject to both aggregate and idiosyncratic shocks. We show that it is challenging to simultaneously match aggregate quantities (asset prices) and individual quantities (asset allocations). Furthermore, limited participation has a negligible impact on the risk premium, contrary to the results of models where it is imposed exogenously.

Keywords: equity premium; preference heterogeneity; incomplete risk sharing; life-cycle models; limited stock market participation. (search for similar items in EconPapers)
JEL-codes: E21 G11 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2005-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://eprints.lse.ac.uk/24649/ Open access version. (application/pdf)

Related works:
Journal Article: Asset Pricing with Limited Risk Sharing and Heterogeneous Agents (2008)
Working Paper: Asset Pricing with Limited Risk Sharing and Heterogeneous Agents (2007)
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:ehl:lserod:24649

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager (lseresearchonline@lse.ac.uk).