Asset Pricing and the One Percent

Alexis Akira Toda and Kieran Walsh
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Kieran Walsh: University of Virginia Darden School of Business

No 858, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We find that when the income share of the top 1% income earners in the U.S. rises above trend by one percentage point, subsequent one year market excess returns decline on average by 5.6%. This negative relation remains strong and significant even when controlling for classic return predictors such as the price-dividend and the consumption-wealth ratios. To explain this stylized fact, we build a general equilibrium asset pricing model with heterogeneity in wealth and risk aversion across agents. Our model admits a testable moment condition and a novel two factor covariance pricing formula, where one factor is inequality. Intuitively, when wealth shifts into the hands of rich and risk tolerant agents, average risk aversion falls, pushing down the risk premium. Our model is broadly consistent with data and provides a novel positive explanation of both market excess returns over time and the cross section of returns across stocks.

Date: 2015
New Economics Papers: this item is included in nep-dge
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Related works:
Working Paper: The Equity Premium and the One Percent (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:858

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