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Inequality, stock market participation, and the equity premium

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  • Favilukis, Jack
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    Abstract

    The last 30 years saw substantial increases in wealth inequality and stock market participation, smaller increases in consumption inequality and the fraction of indebted households, a decline in interest rates and the expected equity premium, as well as a prolonged stock market boom. In an incomplete markets, overlapping generations model I jointly explain these trends by the observed rise in wage inequality, decrease in participation costs, and loosening of borrowing constraints. After accounting for these changes, I show that the stock market played a major role in increasing wealth inequality. Crucially, these phenomena must be considered jointly; studying one independently leads to counterfactual predictions about others.

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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 107 (2013)
    Issue (Month): 3 ()
    Pages: 740-759

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    Handle: RePEc:eee:jfinec:v:107:y:2013:i:3:p:740-759
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

    Keywords: Inequality; Asset returns; Stock market participation;

    Find related papers by JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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

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    Cited by:

    1. Denis Gorea, 2013. "Tax Avoidance, Welfare Transfers, and Asset Prices," 2013 Meeting Papers 1054, Society for Economic Dynamics.
    2. Jack Favilukis & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2014. "Foreign Ownership of U.S. Safe Assets: Good or Bad?," NBER Working Papers 19917, National Bureau of Economic Research, Inc.
    3. Marcin Kacperczyk & Jaromir B. Nosal & Luminita Stevens, 2014. "Investor Sophistication and Capital Income Inequality," NBER Working Papers 20246, National Bureau of Economic Research, Inc.

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