IDEAS home Printed from https://ideas.repec.org/p/cca/wpaper/407.html
   My bibliography  Save this paper

Income Insurance and the Equilibrium Term-Structure of Equity

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.carloalberto.org/wp-content/uploads/2018/11/no.407.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin Lettau & Stijn Van Nieuwerburgh, 2008. "Reconciling the Return Predictability Evidence," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1607-1652, July.
    2. P. Lopez, 2014. "The Term Structure of the Welfare Cost of Uncertainty," Working papers 521, Banque de France.
    3. Danthine, Jean Pierre & Donaldson, John B., 1992. "Risk sharing in the business cycle," European Economic Review, Elsevier, vol. 36(2-3), pages 468-475, April.
    4. Kuehn Lars-Alexander & Petrosky-Nadeau Nicolas & Zhang Lu, "undated". "An Equilibrium Asset Pricing Model with Labor Market Search," GSIA Working Papers 2010-E63, Carnegie Mellon University, Tepper School of Business.
    5. Andrés Donangelo, 2014. "Labor Mobility: Implications for Asset Pricing," Journal of Finance, American Finance Association, vol. 69(3), pages 1321-1346, June.
    6. Jules van Binsbergen & Michael Brandt & Ralph Koijen, 2012. "On the Timing and Pricing of Dividends," American Economic Review, American Economic Association, vol. 102(4), pages 1596-1618, June.
    7. Mariano M. Croce & Martin Lettau & Sydney C. Ludvigson, 2015. "Investor Information, Long-Run Risk, and the Term Structure of Equity," Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 706-742.
    8. Gomme, Paul & Greenwood, Jeremy, 1995. "On the cyclical allocation of risk," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 91-124.
    9. Martin Lettau & Sydney C. Ludvigson, 2014. "Shocks and Crashes," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 293-354.
    10. Lars Peter Hansen & John C. Heaton & Nan Li, 2008. "Consumption Strikes Back? Measuring Long-Run Risk," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 260-302, April.
    11. Lars Peter Hansen & José A. Scheinkman, 2009. "Long-Term Risk: An Operator Approach," Econometrica, Econometric Society, vol. 77(1), pages 177-234, January.
    12. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    13. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2005. "Insurance within the Firm," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1054-1087, October.
    14. Sydney Ludvigson & Martin Lettau & Daniel Greenwald, 2014. "The Origins of Stock Market Fluctuations," 2014 Meeting Papers 542, Society for Economic Dynamics.
    15. Frederico Belo & Pierre Collin-Dufresne & Robert S. Goldstein, 2015. "Dividend Dynamics and the Term Structure of Dividend Strips," Journal of Finance, American Finance Association, vol. 70(3), pages 1115-1160, June.
    16. George M. Constantinides & Anisha Ghosh, 2011. "Asset Pricing Tests with Long-run Risks in Consumption Growth," The Review of Asset Pricing Studies, Oxford University Press, vol. 1(1), pages 96-136.
    17. Fernando Alvarez & Urban J. Jermann, 2005. "Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth," Econometrica, Econometric Society, vol. 73(6), pages 1977-2016, November.
    18. Lettau, Martin & Ludvigson, Sydney C., 2005. "Expected returns and expected dividend growth," Journal of Financial Economics, Elsevier, vol. 76(3), pages 583-626, June.
    19. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    20. John H. Cochrane, 2008. "The Dog That Did Not Bark: A Defense of Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1533-1575, July.
    21. Larrain, Borja & Yogo, Motohiro, 2008. "Does firm value move too much to be justified by subsequent changes in cash flow," Journal of Financial Economics, Elsevier, vol. 87(1), pages 200-226, January.
    22. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
    23. Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Critical Finance Review, now publishers, vol. 1(1), pages 141-182, January.
    24. Jean-Pierre Danthine & John B. Donaldson & Paolo Siconolfi, 2005. "Distribution Risk and Equity Returns," Cahiers de Recherches Economiques du Département d'économie 05.10, Université de Lausanne, Faculté des HEC, Département d’économie.
    25. David M. Kreps & Evan L. Porteus, 2013. "Temporal von Neumann—Morgenstern and Induced Preferences," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 11, pages 181-206, World Scientific Publishing Co. Pte. Ltd..
    26. Thomas Eisenbach & Martin Schmalz & Marianne Andries, 2015. "Asset Pricing with Horizon-Dependent Risk Aversion," 2015 Meeting Papers 1069, Society for Economic Dynamics.
    27. Florian Schulz, 2016. "On the Timing and Pricing of Dividends: Comment," American Economic Review, American Economic Association, vol. 106(10), pages 3185-3223, October.
    28. Curatola, Giuliano, 2015. "Loss aversion, habit formation and the term structures of equity and interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 103-122.
    29. Martin Lettau & Jessica A. Wachter, 2007. "Why Is Long‐Horizon Equity Less Risky? A Duration‐Based Explanation of the Value Premium," Journal of Finance, American Finance Association, vol. 62(1), pages 55-92, February.
    30. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
    31. Hasler, Michael & Marfè, Roberto, 2016. "Disaster recovery and the term structure of dividend strips," Journal of Financial Economics, Elsevier, vol. 122(1), pages 116-134.
    32. Boldrin, Michael & Horvath, Michael, 1995. "Labor Contracts and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 972-1004, October.
    33. Roberto Marfè, 2016. "Corporate Fraction and the Equilibrium Term Structure of Equity Risk," Review of Finance, European Finance Association, vol. 20(2), pages 855-905.
    34. Tony Berrada & Jerome Detemple & Marcel Rindisbacher, 2013. "Asset Pricing with Regime-Dependent Preferences and Learning," Swiss Finance Institute Research Paper Series 13-44, Swiss Finance Institute, revised Oct 2013.
    35. Tano Santos & Pietro Veronesi, 2006. "Labor Income and Predictable Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 1-44.
    36. van Binsbergen, Jules & Hueskes, Wouter & Koijen, Ralph & Vrugt, Evert, 2013. "Equity yields," Journal of Financial Economics, Elsevier, vol. 110(3), pages 503-519.
      • Jules H. van Binsbergen & Wouter Hueskes & Ralph Koijen & Evert B. Vrugt, 2011. "Equity Yields," NBER Working Papers 17416, National Bureau of Economic Research, Inc.
    37. Jonathan B. Berk & Johan Walden, 2013. "Limited Capital Market Participation and Human Capital Risk," The Review of Asset Pricing Studies, Oxford University Press, vol. 3(1), pages 1-37.
    38. Azariadis, Costas, 1978. "Escalator clauses and the allocation of cyclical risks," Journal of Economic Theory, Elsevier, vol. 18(1), pages 119-155, June.
    39. Jack Favilukis & Xiaoji Lin, 2016. "Wage Rigidity: A Quantitative Solution to Several Asset Pricing Puzzles," Review of Financial Studies, Society for Financial Studies, vol. 29(1), pages 148-192.
    40. Ravi Bansal & Dana Kiku & Amir Yaron, 2010. "Long Run Risks, the Macroeconomy, and Asset Prices," American Economic Review, American Economic Association, vol. 100(2), pages 542-546, May.
    41. Lettau, Martin & Wachter, Jessica A., 2011. "The term structures of equity and interest rates," Journal of Financial Economics, Elsevier, vol. 101(1), pages 90-113, July.
    42. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    43. JULES H. Van BINSBERGEN & RALPH S. J. KOIJEN, 2010. "Predictive Regressions: A Present‐Value Approach," Journal of Finance, American Finance Association, vol. 65(4), pages 1439-1471, August.
    44. Weber, Michael, 2018. "Cash flow duration and the term structure of equity returns," Journal of Financial Economics, Elsevier, vol. 128(3), pages 486-503.
    45. Benzoni, Luca & Collin-Dufresne, Pierre & Goldstein, Robert S., 2011. "Explaining asset pricing puzzles associated with the 1987 market crash," Journal of Financial Economics, Elsevier, vol. 101(3), pages 552-573, September.
    46. Gamber, Edward N, 1988. "Long-term Risk-Sharing Wage Contracts in an Economy Subject to Permanent and Temporary Shocks," Journal of Labor Economics, University of Chicago Press, vol. 6(1), pages 83-99, January.
    47. Longstaff, Francis A. & Piazzesi, Monika, 2004. "Corporate earnings and the equity premium," Journal of Financial Economics, Elsevier, vol. 74(3), pages 401-421, December.
    48. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    49. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 37-50.
    50. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
    51. Jean-Pierre Danthine & John B. Donaldson, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 41-64.
    52. Pier Lopez & J. David López-Salido & Francisco Vazquez-Grande, 2015. "Nominal Rigidities and the Term Structures of Equity and Bond Returns," Finance and Economics Discussion Series 2015-64, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michael Hasler & Mariana Khapko & Roberto Marfè, 2020. "Rational Learning and the Term Structures of Value and Growth Risk Premia," Carlo Alberto Notebooks 622, Collegio Carlo Alberto.
    2. TAKAMIZAWA, Hideyuki & 高見澤, 秀幸, 2018. "An Equilibrium Model of Term Structures of Bonds and Equities," Working Paper Series G-1-19, Hitotsubashi University Center for Financial Research.
    3. Martin Lettau & Sydney C. Ludvigson & Sai Ma, 2019. "Capital Share Risk in U.S. Asset Pricing," Journal of Finance, American Finance Association, vol. 74(4), pages 1753-1792, August.
    4. van Binsbergen, Jules H. & Koijen, Ralph S.J., 2017. "The term structure of returns: Facts and theory," Journal of Financial Economics, Elsevier, vol. 124(1), pages 1-21.
    5. Pierlauro Lopez, 2021. "Welfare Implications of Asset Pricing Facts: Should Central Banks Fill Gaps or Remove Volatility?," Working Papers 21-16, Federal Reserve Bank of Cleveland.
    6. Matthijs Breugem & Stefano Colonnello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Carlo Alberto Notebooks 626, Collegio Carlo Alberto.
      • Matthijs Breugem & Stefano Colonello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Working Papers 2020:21, Department of Economics, University of Venice "Ca' Foscari".
    7. 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.
    8. Ai, Hengjie & Croce, Mariano Massimiliano & Diercks, Anthony & Li, Kai, 2018. "News Shocks and the Production-Based Term Structure of Equity Returns," CEPR Discussion Papers 12661, C.E.P.R. Discussion Papers.
    9. Wagner, Konstantin, 2020. "Competition, cost structure, and labour leverage: Evidence from the U.S. airline industry," IWH Discussion Papers 21/2020, Halle Institute for Economic Research (IWH).
    10. Mahlstedt, Robert & Weber, Rüdiger, 2020. "Risk Sharing Within and Outside the Firm: The Disparate Effects of Wrongful Discharge Laws on Expected Stock Returns," IZA Discussion Papers 13941, Institute of Labor Economics (IZA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roberto Marfè, 2015. "Labor Rigidity and the Dynamics of the Value Premium," Carlo Alberto Notebooks 429, Collegio Carlo Alberto.
    2. van Binsbergen, Jules H. & Koijen, Ralph S.J., 2017. "The term structure of returns: Facts and theory," Journal of Financial Economics, Elsevier, vol. 124(1), pages 1-21.
    3. Roberto Marfè, 2016. "Labor Rigidity, In ation Risk and Bond Returns," Carlo Alberto Notebooks 461, Collegio Carlo Alberto.
    4. Hasler, Michael & Marfè, Roberto, 2016. "Disaster recovery and the term structure of dividend strips," Journal of Financial Economics, Elsevier, vol. 122(1), pages 116-134.
    5. Roberto Marfè, 2016. "Corporate Fraction and the Equilibrium Term Structure of Equity Risk," Review of Finance, European Finance Association, vol. 20(2), pages 855-905.
    6. Matthijs Breugem & Stefano Colonello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Working Papers 2020:21, Department of Economics, University of Venice "Ca' Foscari".
    7. Hasler, Michael & Khapko, Mariana & Marfè, Roberto, 2019. "Should investors learn about the timing of equity risk?," Journal of Financial Economics, Elsevier, vol. 132(3), pages 182-204.
    8. TAKAMIZAWA, Hideyuki & 高見澤, 秀幸, 2018. "An Equilibrium Model of Term Structures of Bonds and Equities," Working Paper Series G-1-19, Hitotsubashi University Center for Financial Research.
    9. Frederico Belo & Pierre Collin-Dufresne & Robert S. Goldstein, 2012. "Endogenous Dividend Dynamics and the Term Structure of Dividend Strips," NBER Working Papers 18450, National Bureau of Economic Research, Inc.
    10. Michael Hasler & Mariana Khapko & Roberto Marfè, 2020. "Rational Learning and the Term Structures of Value and Growth Risk Premia," Carlo Alberto Notebooks 622, Collegio Carlo Alberto.
    11. Backus, David & Boyarchenko, Nina & Chernov, Mikhail, 2018. "Term structures of asset prices and returns," Journal of Financial Economics, Elsevier, vol. 129(1), pages 1-23.
    12. Ludvigson, Sydney C., 2013. "Advances in Consumption-Based Asset Pricing: Empirical Tests," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 799-906, Elsevier.
    13. Bansal, Ravi & Miller, Shane & Song, Dongho & Yaron, Amir, 2021. "The term structure of equity risk premia," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1209-1228.
    14. David Backus & Mikhail Chernov & Stanley Zin, 2014. "Sources of Entropy in Representative Agent Models," Journal of Finance, American Finance Association, vol. 69(1), pages 51-99, February.
    15. Weber, Michael, 2018. "Cash flow duration and the term structure of equity returns," Journal of Financial Economics, Elsevier, vol. 128(3), pages 486-503.
    16. Ravi Jagannathan & Binying Liu, 2019. "Dividend Dynamics, Learning, and Expected Stock Index Returns," Journal of Finance, American Finance Association, vol. 74(1), pages 401-448, February.
    17. Koijen, Ralph S.J. & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2017. "The cross-section and time series of stock and bond returns," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 50-69.
    18. Pierlauro Lopez, 2016. "Welfare Implications of the Term Structure of Returns: Should Central Banks Fill Gaps or Remove Volatility?," 2016 Meeting Papers 742, Society for Economic Dynamics.
    19. Pierlauro Lopez, 2021. "Welfare Implications of Asset Pricing Facts: Should Central Banks Fill Gaps or Remove Volatility?," Working Papers 21-16, Federal Reserve Bank of Cleveland.
    20. John H. Cochrane, 2017. "Macro-Finance," Review of Finance, European Finance Association, vol. 21(3), pages 945-985.

    More about this item

    Keywords

    term structure of equity; income insurance; dividend strips; distributional risk; equilibrium asset pricing;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cca:wpaper:407. 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: . General contact details of provider: https://edirc.repec.org/data/fccaait.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Giovanni Bert (email available below). General contact details of provider: https://edirc.repec.org/data/fccaait.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.