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Equity premium under multiple background risks

Author

Listed:
  • Yoichiro Fujii

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

  • Yutaka Nakamura

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

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.

Suggested Citation

  • Yoichiro Fujii & Yutaka Nakamura, 2010. "Equity premium under multiple background risks," Economics Bulletin, AccessEcon, vol. 30(2), pages 933-939.
    • Handle: RePEc:ebl:ecbull:eb-09-00690
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    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    4. Pindyck, Robert S, 1988. "Risk Aversion and Determinants of Stock Market Behavior," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 183-190, May.
    5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    6. Gollier, Christian & Schlesinger, Harris, 2002. "Changes in risk and asset prices," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 747-760, May.
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    Cited by:

    1. Fujii, Yoichiro & Nakamura, Yutaka, 2021. "Regret-sensitive equity premium," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 302-307.

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    More about this item

    Keywords

    equity premium; static Lucas model; background risk; equilibrium price;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

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