The equity premium and the allocation of income risk

Jean-Pierre Danthine, John B. Donaldson and Rajnish Mehra

No 60, Discussion Paper / Institute for Empirical Macroeconomics from Federal Reserve Bank of Minneapolis

Abstract: This paper examines the extent to which the equity premium puzzle can be resolved by taking account of the fact that stockholders bear a disproportionate share of output uncertainty. We do this in the context of a non-Walrasian RBC model where risk reallocation is justified by borrowing restrictions. The risk shifting mechanism we propose has the same effect as would arise from a substantial increase in the risk aversion parameter of the representative agent. As with more standard RBC models, it remains that our model is unable to replicate key financial statistics. In particular, the observation that the equity return is more variable than national product cannot be accounted for under standard technology assumptions.

Keywords: Risk; Stock - Prices (search for similar items in EconPapers)
Date: 1992
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Citations: View citations in EconPapers (30)

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Working Paper: The equity premium and the allocation of income risk (2010)
Journal Article: The equity premium and the allocation of income risk (1992)
Working Paper: The Equity Premium and the Allocation of Income Risk (1992)
Working Paper: The Equity Premium and the Allocation of Income Risk (1992)
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