Asset Pricing with Endogenously Uninsurable Tail Risk
Hengjie Ai and
No 24972, NBER Working Papers from National Bureau of Economic Research, Inc
This paper studies asset pricing and labor market dynamics in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can fully commit; furthermore, owing to costly and unobservable retention effort, worker-firm relationships have endogenous durations. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In equilibrium, exposure to the tail risk generates higher aggregate risk premia and higher return volatility. Consistent with data, firm-level labor share predicts both future returns and pass-throughs of firm-level shocks to labor compensation.
JEL-codes: E24 G12 J3 (search for similar items in EconPapers)
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Working Paper: Asset Pricing with Endogenously Uninsurable Tail Risk (2018)
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