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Distribution Risk and Equity Returns

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  • Danthine, Jean-Pierre
  • Siconolfi, Paolo
  • Donaldson, John B

Abstract

In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labour relations. We show that this view implies that income share variations represent a risk factor of first-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks.

Suggested Citation

  • Danthine, Jean-Pierre & Siconolfi, Paolo & Donaldson, John B, 2005. "Distribution Risk and Equity Returns," CEPR Discussion Papers 5425, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5425
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Shares in people
      by chris dillow in Stumbling and Mumbling on 2013-10-23 17:27:02

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    Cited by:

    1. Ivan Jaccard, 2007. "Asset Pricing, Habit Memory, and the Labor Market," Swiss Finance Institute Research Paper Series 07-23, Swiss Finance Institute, revised Nov 2007.
    2. Claudia M. Buch, 2008. "The Great Risk Shift? Income Volatility in an International Perspective," CESifo Working Paper Series 2465, CESifo.
    3. Jean-Pierre Danthine & Xiangrong Jin, 2007. "Intangible capital, corporate valuation and asset pricing," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(1), pages 157-177, July.
    4. Roberto Marfè, 2017. "Income Insurance and the Equilibrium Term Structure of Equity," Journal of Finance, American Finance Association, vol. 72(5), pages 2073-2130, October.
    5. John Donaldson & Rajnish Mehra, 2007. "Risk Based Explanations of the Equity Premium," NBER Working Papers 13220, National Bureau of Economic Research, Inc.
    6. Murphy, Austin & Zhu, Yun (Ellen), 2008. "Unraveling the complex interrelationships between exchange rates and fundamentals," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1150-1160, June.

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    More about this item

    Keywords

    Income shares; Distribution risk; Equity premium; Limited market participation;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets

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