225 research outputs found
Reconciling Increasing Wealth Inequality with Increasing Market Participation and a Decreasing Equity Premium
Over the last 30 years stock market participation has increased and the equity premium has declined, this would presumably lead to a decrease in wealth inequality. However, just the opposite has happened as wealth inequality has increased. I propose a general equilibrium model which can both resolve the equity premium puzzle and reproduce the high inequality of wealth seen in the data. I use this model to show
that increasing wage inequality can reconcile the initially incompatible observations above. I also use the model to show that changes in age demographics may be responsible for a significant fraction of the
decreasing equity premium
An estimation of economic models with recursive preferences
This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility model, evaluates the model's ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17 to 60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above 1. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the Center for Research in Security Prices value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return
Reconciling Increasing Wealth Inequality with Increasing Market Participation and a Decreasing Equity Premium
Over the last 30 years stock market participation has increased and the equity premium has declined, this would presumably lead to a decrease in wealth inequality. However, just the opposite has happened as wealth inequality has increased. I propose a general equilibrium model which can both resolve the equity premium puzzle and reproduce the high inequality of wealth seen in the data. I use this model to show
that increasing wage inequality can reconcile the initially incompatible observations above. I also use the model to show that changes in age demographics may be responsible for a significant fraction of the
decreasing equity premium
An Estimation of Economic Models with Recursive Preferences
This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) (EZW) recursive utility model, evaluates the model's ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17-60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above one. In addition, the estimated model-implied aggregate wealth return is found to be weakly correlated with the CRSP value-weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.
The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium
This paper studies the role of time-varying risk premia as a channel for generating and propagating fluctuations in housing markets, aggregate quantities, and consumption and wealth heterogeneity. We study a two-sector general equilibrium model of housing and non-housing production where heterogeneous households face limited opportunities to insure against aggregate and idiosyncratic risks. The model generates large variability in the national house price-rent ratio, both because it fluctuates endogenously with the state of the economy and because it rises in response to a relaxation of credit constraints and decline in housing transaction costs (financial market liberalization). These factors, together with a rise in foreign ownership of U.S. debt calibrated to match the actual increase over the period 2000-2006, generate fluctuations in the model price-rent ratio that explains a large fraction of the increase in the national price-rent ratio observed in U.S. data over this period. The model also predicts a sharp decline in home prices starting in 2007, driven by the economic contraction and by a presumed reversal of the financial market liberalization. Fluctuations in the model's price-rent ratio are driven by changing risk premia, which fluctuate endogenously in response to cyclical shocks, the financial market liberalization, and its subsequent reversal. By contrast, we show that the inflow of foreign money into domestic bond markets plays a small role in driving home prices, despite its large depressing influence on interest rates. Finally, the model implies that procyclical increases in equilibrium price-rent ratios reflect rational expectations of lower future housing returns, not higher future rents.
Labor market dynamics, endogenous growth, and asset prices
We extend the endogenous growth model of Kung and Schmid (2015) by adding endogenous labor dynamics and two variants of wage rigidities. This leads to an increase of 250-350 basis points in the risk premia, depending on the model specification. Additionally, it brings labor market quantities much closer to their empirical counterparts. In particular, wage rigidities generate an increase of around 60-250 basis points in labor growth volatility, which depends on how wage rigidities are modeled. (C) 2016 Elsevier B.V. All rights reserved
Economic Activity of Firms and Asset Prices
In this review we survey the recent research on the fundamental determinants of stock returns. These studies explore how firms' systematic risk and their investment and production decisions are jointly determined in equilibrium. Models with production provide insights into several types of empirical patterns, including (a) the correlations between firms' economic characteristics and their risk premia, (b) the comovement of stock returns among firms with similar characteristics, and (c) the joint dynamics of asset returns and macroeconomic quantities. Moreover, by explicitly relating firms' stock returns and cash flows to fundamental shocks, models with production connect the analysis of financial markets with the research on the origins of macroeconomic fluctuations
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