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Asset pricing with concentrated ownership of capital

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  • Kevin J. Lansing

    () (Norges Bank (Central Bank of Norway) and Federal Reserve Bank of San Francisco)

Abstract

This paper investigates how concentrated ownership of capital influences the pricing of risky assets in a production economy. The model is designed to approximate the skewed distribution of wealth and income in U.S. data. I show that concentrated ownership significantly magnifies the equity risk premium relative to an otherwise similar representative-agent economy because the capital owners' consumption is more strongly linked to volatile dividends from equity. A temporary shock to the technology for producing new capital (an "investment shock") causes dividend growth to be much more volatile than aggregate consumption growth, as in long-run U.S. data. The investment shock can also be interpreted as a depreciation shock, or more generally, a financial friction that affects the supply of new capital. Under power utility with a risk aversion coeffecient of 3.5, the model can roughly match the first and second moments of key asset pricing variables in long-run U.S. data, including the historical equity risk premium. About one-half of the model equity premium is attributable to the investment shock while the other half is attributable to a standard productivity shock. On the macro side, the model performs reasonably well in matching the business cycle moments of aggregate variables, including the pro-cyclical movement of capital's share of total income in U.S. data.

Suggested Citation

  • Kevin J. Lansing, 2011. "Asset pricing with concentrated ownership of capital," Working Paper 2011/18, Norges Bank.
  • Handle: RePEc:bno:worpap:2011_18
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    File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2011/WP-201118/
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    References listed on IDEAS

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    Cited by:

    1. Furlanetto, Francesco & Seneca, Martin, 2014. "New Perspectives On Depreciation Shocks As A Source Of Business Cycle Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 18(06), pages 1209-1233, September.
    2. repec:eee:poleco:v:48:y:2017:i:c:p:91-103 is not listed on IDEAS
    3. repec:eee:jmacro:v:53:y:2017:i:c:p:92-106 is not listed on IDEAS
    4. Lansing, Kevin J., 2012. "Speculative growth, overreaction, and the welfare cost of technology-driven bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 461-483.

    More about this item

    Keywords

    Asset pricing; Equity premium; Term premium; Investment shocks; Real business cycles; Wealth inequality;

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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