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Distribution Risk and Equity Returns

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  • Danthine, Jean-Pierre
  • Donaldson, John B
  • Siconolfi, Paolo

Abstract

In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labour relations. We show that this view implies that income share variations represent a risk factor of first-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5425.

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Date of creation: Dec 2005
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Handle: RePEc:cpr:ceprdp:5425

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Keywords: distribution risk; equity premium; income shares; limited market participation;

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References

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  1. Michele Boldrin & Michael Horvath, 1994. "Labor Contracts and Business Cycles," Discussion Papers 1068, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Jean-Pierre Danthine & John B. Donaldson, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 41-64.
  3. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
  4. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  5. Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 20-40.
  6. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  7. Danthine, J.P. & Donaldson, J.B. & Mehra, R., 1992. "The Equity Premium and the Allocation of Income Risk," Papers 92-09, Columbia - Graduate School of Business.
  8. William Goetzmann & Philippe Jorion, 1997. "A Century of Global Stock Markets," Yale School of Management Working Papers ysm53, Yale School of Management, revised 01 Aug 2000.
  9. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
  10. Michele Boldrin & Adrian Peralta-Alva, 2009. "What happened to the U.S. stock market? accounting for the past 50 years," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 627-646.
  11. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  12. Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
  13. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  14. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
  15. Ellen R. McGrattan & Edward C. Prescott, 2004. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Levine's Bibliography 122247000000000715, UCLA Department of Economics.
  16. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  17. Dow, James Jr., 1995. "Real business cycles and labor markets with imperfectly flexible wages," European Economic Review, Elsevier, vol. 39(9), pages 1683-1696, December.
  18. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  19. M. Fatih Guvenen, 2003. "A Parsimonious Macroeconomic Model for Asset Pricing: Habit Formation or Cross-sectional Heterogeneity?," RCER Working Papers 499, University of Rochester - Center for Economic Research (RCER).
  20. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Shares in people
    by chris dillow in Stumbling and Mumbling on 2013-10-23 12:27:02
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Cited by:
  1. Jean-Pierre DANTHINE & Xiangrong JIN, 2006. "Intangible Capital, Corporate Valuation and Asset Pricing," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 06.05, Université de Lausanne, Faculté des HEC, DEEP.
  2. Ivan Jaccard, 2007. "Asset Pricing, Habit Memory, and the Labor Market," Swiss Finance Institute Research Paper Series 07-23, Swiss Finance Institute, revised Nov 2007.
  3. Murphy, Austin & Zhu, Yun (Ellen), 2008. "Unraveling the complex interrelationships between exchange rates and fundamentals," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1150-1160, June.
  4. Claudia M. Buch, 2008. "The Great Risk Shift? Income Volatility in an International Perspective," CESifo Working Paper Series 2465, CESifo Group Munich.

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