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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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