Income Inequality and Stock Market Returns

Agnieszka Markiewicz () and Rafal Raciborski
Additional contact information
Rafal Raciborski: European Commission

No 18-075/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: In this paper, we study the relationship between income inequality and stock market returns. We develop a quantitative general equilibrium model that links shifts in both labour and capital income inequality to stock market variables. An increase of the share of capital owners’ income from risky capital leads to higher equity premium and a rise in their non-risky, labor share of income reduces it. When we calibrate our model to match the empirical size of shifts in the last five decades, we find that the negative impact of the higher labour share of income of capital owners dominates and brings the equity premium below the historical value by 0.79 percentage points, in line with the data. If both capital and total income shares of top decile would continue growing at the historical rate between 1970 and 2014, the equity premium would continue decreasing to 6.11% in 2030, 0.92 percentage point lower than historical equity premium of 7.03%. If instead only the capital share of income continues to grow, the equity premium would be higher than the historical average by 0.57 percentage point. If the labour income dispersion remains constant, the historical equity premium of 7.03% would be reached by 2030 if the capital share of income was growing by 1.4% each year.

Keywords: Asset Pricing; Risk Premium Dynamics; Income Inequality; Computational Macroeconomics (search for similar items in EconPapers)
JEL-codes: D31 E32 E44 H21 O33 (search for similar items in EconPapers)
Date: 2018-10-07
New Economics Papers: this item is included in nep-cmp, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papers.tinbergen.nl/18075.pdf (application/pdf)

Related works:
Journal Article: Income Inequality and Stock Market Returns (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20180075

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().