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Inequality risk premia

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  • Johnson, Timothy C.

Abstract

Using a long time-series of U.S. income inequality, I find that the market pays higher prices for assets that hedge against increased inequality. This is consistent with the prediction of an incomplete-markets model incorporating preferences over both comparative and noncomparative consumption “goods” when the weight on the former is large. The model implies that the time-series properties of the premium can be used to identify the substitutability of these two sources of utility. There is evidence that the magnitude of the (negative) inequality risk premium is countercyclical, suggesting that agents care more about status when they are worse off.

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  • Johnson, Timothy C., 2012. "Inequality risk premia," Journal of Monetary Economics, Elsevier, vol. 59(6), pages 565-580.
    • Handle: RePEc:eee:moneco:v:59:y:2012:i:6:p:565-580
    DOI: 10.1016/j.jmoneco.2012.06.008
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    Cited by:

    1. Pástor, Lˇuboš & Veronesi, Pietro, 2016. "Income inequality and asset prices under redistributive taxation," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 1-20.
    2. Christou, Christina & Gupta, Rangan & Jawadi, Fredj, 2021. "Does inequality help in forecasting equity premium in a panel of G7 countries?," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    3. Gupta, Rangan & Pierdzioch, Christian & Vivian, Andrew J. & Wohar, Mark E., 2019. "The predictive value of inequality measures for stock returns: An analysis of long-span UK data using quantile random forests," Finance Research Letters, Elsevier, vol. 29(C), pages 315-322.
    4. Johnson, Timothy C., 2016. "Rethinking reversals," Journal of Financial Economics, Elsevier, vol. 120(2), pages 211-228.
    5. Chen, Zhanhui & Yang, Bowen, 2019. "In search of preference shock risks: Evidence from longevity risks and momentum profits," Journal of Financial Economics, Elsevier, vol. 133(1), pages 225-249.

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