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Asset Pricing with Endogenously Uninsurable Tail Risk

Hengjie Ai and Anmol Bhandari

No 24972, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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)
Date: 2018-08
New Economics Papers: this item is included in nep-cta, nep-dge, nep-ias and nep-mac
Note: AP EFG
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