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Income Insurance and the Equilibrium Term-Structure of Equity

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  • Roberto Marfè

Abstract

This paper documents that GDP, wages and dividends are co-integrated but feature term-structures of risk respectively flat, increasing and decreasing. Income insurance within the firm from shareholders to workers explains those term-structures: distributional risk smooths wages and enhances the short-run risk of dividends. A simple general equilibrium model, where labor rigidity affects dividend dynamics and the price of short-run risk, reconciles standard asset pricing facts with the term-structures of equity premium and volatility and those of macroeconomic variables, at odds in leading models. Income insurance also helps to explain dividend growth predictability, cross-sectional value premia, counter-cyclical Sharpe-ratios, and interest rates term-premia.

Suggested Citation

  • Roberto Marfè, 2015. "Income Insurance and the Equilibrium Term-Structure of Equity," Carlo Alberto Notebooks 407, Collegio Carlo Alberto.
  • Handle: RePEc:cca:wpaper:407
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    Cited by:

    1. Lettau, Martin & Ludvigson, Sydney & Ma, Sai, 2018. "Capital Share Risk in U.S. Asset Pricing," CEPR Discussion Papers 12628, C.E.P.R. Discussion Papers.
    2. Daniel L. Greenwald & Martin Lettau & Sydney C. Ludvigson, 2019. "How the Wealth Was Won: Factors Shares as Market Fundamentals," NBER Working Papers 25769, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    term structure of equity; income insurance; dividend strips; distributional risk; equilibrium asset pricing;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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