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Equity Premium with Habits, Wealth Inequality and Background Risk

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  • Christos I. Giannikos

    (Economics, The Graduate Center, City University of New York, New York, NY 10016, USA
    Department of Economics and Finance, Zicklin School of Business, Baruch College, City University of New York, New York, NY 10010, USA)

  • Georgios Koimisis

    (Department of Economics & Finance, O’ Malley School of Business, Manhattan College, Riverdale, NY 10471, USA)

Abstract

In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth inequality will increase or decrease the equity premium even when the income uncertainty is low. This result extends literature by suggesting that wealth inequality has a small role in explaining asset pricing puzzles.

Suggested Citation

  • Christos I. Giannikos & Georgios Koimisis, 2021. "Equity Premium with Habits, Wealth Inequality and Background Risk," JRFM, MDPI, vol. 14(7), pages 1-15, July.
    • Handle: RePEc:gam:jjrfmx:v:14:y:2021:i:7:p:321-:d:592921
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    References listed on IDEAS

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