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Distribution Risk and Equity Returns

  • Jean-Pierre DANTHINE

    (University of Lausanne, FAME and CEPR)


    (Columbia University)


    (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
Date of revision:
Handle: RePEc:fam:rpseri:rp161
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  1. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  2. J. Danthine & J. Donaldson & R. Mehra, 2010. "The equity premium and the allocation of income risk," Levine's Working Paper Archive 1398, David K. Levine.
  3. 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.
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  9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  10. M. Fatih Guvenen, 2003. "A Parsimonious Macroeconomic Model for Asset Pricing: Habit Formation or Cross-sectional Heterogeneity?," RCER Working Papers 499, University of Rochester - Center for Economic Research (RCER).
  11. 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.
  12. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  13. Ellen R. McGrattan & Edward C. Prescott, 2001. "Is the Stock Market Overvalued?," NBER Working Papers 8077, National Bureau of Economic Research, Inc.
  14. 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.
  15. 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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  17. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
  18. 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.
  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.
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