A quantitative study of the role of wealth inequality on asset prices
AbstractThis paper studies the equilibrium properties of asset prices in a Lucas-tree model when agents display a concave coefficient of absolute risk tolerance. The latter introduces a role for wealth inequality, even under the presence of complete markets. The paper finds evidence suggesting that the role of wealth inequality on asset prices may be non-negligible. For the baseline calibration, the equity premium in the unequal economy is half a percentage point larger than the equity premium displayed by an egalitarian economy. The difference increases to one percentage point once we allow for the fact that agents tend to hold highly concentrated portfolios.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 05-12.
Date of creation: 2005
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-01-01 (All new papers)
- NEP-DGE-2006-01-01 (Dynamic General Equilibrium)
- NEP-FIN-2006-01-01 (Finance)
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