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 coefficient 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 Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2011-07.
Date of creation: 2011
Date of revision:
Other versions of this item:
- Kevin J. Lansing, 2011. "Asset pricing with concentrated ownership of capital," Working Paper 2011/18, Norges Bank.
- 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
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- Fransesco Furlanetto & Martin Seneca, 2010.
"New Perspectives on Depreciation Shocks as a Source of Business Cycle Fluctuations,"
wp48, Department of Economics, Central bank of Iceland.
- Francesco Furlanetto & Martin Seneca, 2011. "New perspectives on depreciation shocks as a source of business cycle fluctuations," Working Paper 2011/02, Norges Bank.
- 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.
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