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A quantitative study of the role of wealth inequality on asset prices

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Author Info
Juan Carols Hatchondo
Abstract

This 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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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 05-12.

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Date of creation: 2005
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Handle: RePEc:fip:fedrwp:05-12

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Keywords: Wealth ; Asset pricing;

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  1. repec:cup:macdyn:v:1:y:1997:i:2:p:387-422 is not listed on IDEAS
  2. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June. [Downloadable!] (restricted)
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  3. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity, Portfolio Choice, and Equilibrium Asset Returns," GSIA Working Papers 1997-45, Carnegie Mellon University, Tepper School of Business.
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  4. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887 Elsevier. [Downloadable!] (restricted)
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  5. N. Gregory Mankiw & Stephen P. Zeldes, 1991. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128 Elsevier. [Downloadable!] (restricted)
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  7. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  8. Zoran Ivkovich & Clemens Sialm & Scott Weisbenner, 2004. "Portfolio Concentration and the Performance of Individual Investors," NBER Working Papers 10675, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  10. Gollier, Christian, 2001. "Wealth Inequality and Asset Pricing," Review of Economic Studies, Blackwell Publishing, vol. 68(1), pages 181-203, January.
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  11. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January. [Downloadable!] (restricted)
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  1. Walentin, Karl, 2007. "Earnings Inequality and the Equity Premium," Working Paper Series 215, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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