Asset Prices and Wealth Inequality

Matthieu Gomez
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Matthieu Gomez: Princeton University

No 1155, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper uses recently available data on the top of the wealth distribution to study the relationship between asset prices and wealth inequality. I document three stylized facts: (1) the share of wealth invested in equity increases sharply in the right tail of the wealth distribution, (2) when stock market returns are high, wealth inequality increases and (3) higher wealth inequality predicts lower future stock returns. These facts correspond to the basic predictions of asset pricing models with heterogeneous agents. Quantitatively, however, standard models with heterogeneous agents cannot fully capture the joint dynamics of asset prices and the wealth distribution. Augmenting the model with additional sources of fluctuations in wealth inequality, namely in the form of time-varying investment opportunities for wealthy households, is crucial to match the large fluctuations in wealth inequality and in asset prices.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1155

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