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Can Models with Idiosyncratic Risk Solve the Equity Premium Puzzle? Redux

Author

Listed:
  • Gleb Kozliakov
  • Emile A. Marin
  • Sanjay R. Singh

    (Department of Economics, University of California Davis)

Abstract

Can idiosyncratic risk explain the equity premium? We revisit this question using a novel measure of imperfect risk sharing, implied by a large class of heterogeneous agent models, constructed using household-level panel data. We identify a group of households - with relatively high income but low net-worth - whose consumption is sufficiently volatile and risky to explain 94% of the observed U.S. Sharpe ratio for an elasticity of intertemporal substitution of 0.2. In contrast, the consumption dynamics of high net-worth individuals predict a negative Sharpe ratio so do not constitute the relevant pricing factor, consistent with models featuring wealth motives.

Suggested Citation

  • Gleb Kozliakov & Emile A. Marin & Sanjay R. Singh, 2026. "Can Models with Idiosyncratic Risk Solve the Equity Premium Puzzle? Redux," Working Papers 377, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:377
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    References listed on IDEAS

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    Cited by:

    1. Emile A. Marin & JiYong Jung, 2026. "Looking for Risk: Volatility Bounds in Macro," Working Papers 378, University of California, Davis, Department of Economics.

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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