Asset pricing with concentrated ownership of capital
AbstractThis paper investigates how concentrated ownership of capital influences the pricing of risky assets in a production economy. The model is designed to approximate the skewed distribution of wealth and income in U.S. data. I show that concentrated ownership significantly magnifies the equity risk premium relative to an otherwise similar representative-agent economy because the capital owners' consumption is more strongly linked to volatile dividends from equity. A temporary shock to the technology for producing new capital (an "investment shock") causes dividend growth to be much more volatile than aggregate consumption growth, as in long-run U.S. data. The investment shock can also be interpreted as a depreciation shock, or more generally, a financial friction that affects the supply of new capital. Under power utility with a risk aversion coeffecient of 3.5, the model can roughly match the first and second moments of key asset pricing variables in long-run U.S. data, including the historical equity risk premium. About one-half of the model equity premium is attributable to the investment shock while the other half is attributable to a standard productivity shock. On the macro side, the model performs reasonably well in matching the business cycle moments of aggregate variables, including the pro-cyclical movement of capital's share of total income in U.S. data.
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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2011/18.
Length: 39 pages
Date of creation: 22 Dec 2011
Date of revision:
Asset pricing; Equity premium; Term premium; Investment shocks; Real business cycles; Wealth inequality;
Other versions of this item:
- Kevin J. Lansing, 2011. "Asset pricing with concentrated ownership of capital," Working Paper Series 2011-07, Federal Reserve Bank of San Francisco.
- E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-03 (All new papers)
- NEP-DGE-2012-01-03 (Dynamic General Equilibrium)
- NEP-MAC-2012-01-03 (Macroeconomics)
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- Lansing, Kevin J., 2012. "Speculative growth, overreaction, and the welfare cost of technology-driven bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 461-483.
- Francesco Furlanetto & Martin Seneca, 2011.
"New perspectives on depreciation shocks as a source of business cycle fluctuations,"
2011/02, Norges Bank.
- Fransesco Furlanetto & Martin Seneca, 2010. "New Perspectives on Depreciation Shocks as a Source of Business Cycle Fluctuations," Economics wp48, Department of Economics, Central bank of Iceland.
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