Asset pricing with idiosyncratic risk and overlapping generations

Kjetil Storesletten, Chris Telmer () and Amir Yaron

No 703, Seminar Papers from Stockholm University, Institute for International Economic Studies

Abstract: Constantinides and Duffie (1996) show that for idiosynratic risk to matter for asset pricing the shocks must (i) be highly persistent and (ii) become more volatile during economic contractions. We show that data from the Panel Study on Income Dynamics (PSID) are consistent with these requirements. Our results are based on econometric methods which incorporate macroeconomic information going beyond the time horizon of the PSID, dating back to 1910. We go on to argue that life-cycles effects are fundamental for how idiosyncratic risk affects asset pricing. We use a stationary overlapping-generations model to show that life-cycle effects can either mitigate or accentuate the equity premium, the critical ingredient being whether agents accumulate or deccumulate risky assets as they age. Our model predicts the latter and is able to account for both the average equity premium and the Sharpe ratio observed on the U.S. stock market.

Keywords: asset pricing; idiosyncratic risk; overlapping generations (search for similar items in EconPapers)
JEL-codes: D31 E21 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2002-02-12
New Economics Papers: this item is included in nep-dge, nep-fmk and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://su.diva-portal.org/smash/get/diva2:328962/FULLTEXT01 (application/pdf)

Related works:
Journal Article: Asset Pricing with Idiosyncratic Risk and Overlapping Generations (2007)
Working Paper: Asset Pricing with Idiosyncratic Risk and Overlapping Generations (2001)
Working Paper: Asset pricing with idiosyncratic risk and overlapping generations (1999)
Working Paper: Asset pricing with idiosyncratic risk and overlapping generations
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:hhs:iiessp:0703

Access Statistics for this paper

More papers in Seminar Papers from Stockholm University, Institute for International Economic Studies Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Hanna Christiansson ().