Private Equity Premium and Aggregate Uncertainty in a Model of Uninsurable Investment Risk
This paper studies the quantitative properties of a general equilibrium model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks under the presence of a borrowing constraint. The calibrated model matches the highly skewed wealth and income distributions of entrepreneurs. We provide an accurate solution to the model despite significant nonlinearities that are absent in the economy with uninsurable labor income risk. The model is capable of generating the average private equity premium of roughly 3% and a low risk-free rate. The model also produces procyclicality of the risk-free rate and countercyclicality of the private equity premium. The countercyclicality of the equity premium is largely driven by tightening (loosening) of financing constraints during recessions (booms).
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 11 (2011)
Issue (Month): 1 (July)
|Contact details of provider:|| Web page: http://www.degruyter.com|
|Order Information:||Web: http://www.degruyter.com/view/j/bejm|
When requesting a correction, please mention this item's handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:20. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)
If references are entirely missing, you can add them using this form.