Shifts in Sectoral Wealth Shares and Risk Premia: What Explains Them?

Ravi Bansal, Amir Yaron and Colin Ward
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Amir Yaron: University of Pennsylvania
Colin Ward: University of Minnesota

No 599, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We empirically show across several broad asset classes that sectoral wealth shares do not positively correlate with their risk premia---a first-order prediction of canonical equilibrium models. We then analyze the roles mean-variance and hedging demand play in accounting for sectoral shifts within a two-sector production economy that features imperfect substitutability across goods and demand shocks. With these two features, the model's performance improves, yet still unsatisfactorily accounts for sectoral shifts in wealth shares. We argue that equilibrium models thus face a challenge to explain the cross-sectional evolution of wealth shares and investors' incentives to hold them over time.

Date: 2018
New Economics Papers: this item is included in nep-dge
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