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Equity premium under multiple background risks

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  • Yoichiro Fujii

    ()
    (Graduate School of Systems and Information Engineering, University of Tsukuba)

  • Yutaka Nakamura

    ()
    (Graduate School of Systems and Information Engineering, University of Tsukuba)

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    Abstract

    In a static Lucas's tree economy, we explore the effect of two types of background risk, uninsurable risk for labor income and miscalibrated risk for payoff distribution of risky asset, on the equilibrium price of the risky asset. Then we analyze the data of U.S. stock market and GDP growth rates during 1871-2004 to verify that our simple static model could provide appropriate magnitudes of equity premium.

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    File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I2-P86.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 30 (2010)
    Issue (Month): 2 ()
    Pages: 933-939

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    Handle: RePEc:ebl:ecbull:eb-09-00690

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    Related research

    Keywords: equity premium; static Lucas model; background risk; equilibrium price;

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    1. Finn, M.G. & Hoffman, D.L. & Schlagenhauf, D.E., 1988. "Intertemporal Asset-Pricing Relationships In Barter And Monetary Economies: An Empirical Analysis," UWO Department of Economics Working Papers, University of Western Ontario, Department of Economics 8805, University of Western Ontario, Department of Economics.
    2. Weil, P., 1991. "Equilibrium Asset Prices with Undiversifiable Labor Income Risk," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1564, Harvard - Institute of Economic Research.
    3. Pindyck, Robert S., 1986. "Risk aversion and determinants of stock market behavior," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1801-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(4), pages 323-361, December.
    5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
    6. Harris Schlesinger & Christian Gollier, 2001. "Changes in Risk and Asset Prices," CESifo Working Paper Series 443, CESifo Group Munich.
    7. Klock, Mark & Phillips, Robert F, 1999. " A Model of Return Volatility with Application to Estimating Relative Risk Aversion," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 13(3), pages 249-60, November.
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