The Equity Premium in a DSGE Model with Limited Asset Market Participation

Lorenzo Menna () and Patrizio Tirelli

No 275, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: Models based on the representative agent assumption cannot rationalize observed equity premia. In response to this, exchange economy models have introduced agents heterogeneity, typically in the form of bond and equity holders. We reconsider the issue introducing Limited Asset Market Participation in an otherwise standard medium scale DSGE model. Our model fits financial and macroeconomic data well. We obtain that the correlation between asset holders consumption and financial returns strongly increases in the share of agents excluded from financial markets participation, The predicted unconditional equity premium is therefore large. Further, the strong correlation between dividends and Ricardian households' consumption unambiguously increases precautionary savings and reduces the riskless rate.

Keywords: asset pricing; equity premium; limited asset market participation; business cycle; DSGE; sticky prices. (search for similar items in EconPapers)
JEL-codes: E32 G12 (search for similar items in EconPapers)
Pages: 30
Date: 2014-06, Revised 2014-06
New Economics Papers: this item is included in nep-cfn, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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