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Distribution Risk and Equity Returns

  • Jean-Pierre DANTHINE

    (University of Lausanne, FAME and CEPR)

  • John B. DONALDSON

    (Columbia University)

  • Paolo SICONOLFI

    (Columbia University)

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 labor relations. We show that this view implies that income share variations represent a risk factor of ¯rst-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.

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Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp161.

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Date of creation: Nov 2005
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Handle: RePEc:fam:rpseri:rp161
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  1. Danthine, Jean-Pierre & Donaldson, John B. & Mehra, Rajnish, 1992. "The equity premium and the allocation of income risk," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 509-532.
  2. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  3. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  4. William N. Goetzmann & Philippe Jorion, 2004. "A Century of Global Stock Markets," Yale School of Management Working Papers ysm16, Yale School of Management.
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  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  7. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
  8. repec:oup:restud:v:72:y:2005:i:3:p:767-796 is not listed on IDEAS
  9. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
  10. Michele Boldrin & Adrian Peralta-Alva, 2009. "What happened to the U.S. stock market? accounting for the past 50 years," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 627-646.
  11. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
  12. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  13. 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.
  14. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  15. Ellen R. McGrattan & Edward C. Prescott, 2004. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Levine's Bibliography 122247000000000715, UCLA Department of Economics.
  16. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 01-90, Wharton School Rodney L. White Center for Financial Research.
  17. Fatih Guvenen, 2005. "A Parsimonious Macroeconomic Model for Asset Pricing: Habit Formation of Cross-sectional Heterogeneity?," Finance 0507009, EconWPA.
  18. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
  19. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  20. Dow, James Jr., 1995. "Real business cycles and labor markets with imperfectly flexible wages," European Economic Review, Elsevier, vol. 39(9), pages 1683-1696, December.
  21. 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.
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