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Private risk premium and aggregate uncertainty in the model of uninsurable investment risk

Listed author(s):
  • Francisco Covas
  • Shigeru Fujita

This paper studies cyclical properties of the private risk premium in a model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks, both of which are assumed to be highly persistent. The calibrated model matches highly skewed wealth and income distributions of entrepreneurs found in the Survey of Consumer Finances. The authors provide an accurate numerical solution to the model even though the model is shown to exhibit serious nonlinearities that are absent in incomplete market models with idiosyncratic labor income risk. The model is able to generate the aggregate private risk premium of 2-3 percent and the low risk-free rate. However, it generates very little variation in these variables over the business cycle, suggesting that the model lacks the ability to amplify aggregate shocks. ; Superseded by Working Paper 11-18

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 07-30.

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Date of creation: 2007
Handle: RePEc:fip:fedpwp:07-30
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  1. Den Haan, Wouter J., 2010. "Assessing the accuracy of the aggregate law of motion in models with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 79-99, January.
  2. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2007. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Chapters,in: NBER Macroeconomics Annual 2006, Volume 21, pages 107-180 National Bureau of Economic Research, Inc.
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  4. Covas, Francisco, 2006. "Uninsured idiosyncratic production risk with borrowing constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2167-2190, November.
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  8. Angeletos, George-Marios & Calvet, Laurent-Emmanuel, 2006. "Idiosyncratic production risk, growth and the business cycle," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1095-1115, September.
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  10. Telmer, Chris I. & Zin, Stanley E., 2002. "Prices as factors: Approximate aggregation with incomplete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1127-1157, July.
  11. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
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  15. Yaz Terajima, 2006. "Education and Self-Employment: Changes in Earnings and Wealth Inequality," Staff Working Papers 06-40, Bank of Canada.
  16. Wouter J. Den Haan & Albert Marcet, 1994. "Accuracy in Simulations," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 3-17.
  17. Eric R Young, 2005. "Approximate Aggregation," Computing in Economics and Finance 2005 141, Society for Computational Economics.
  18. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
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  20. Den Haan, Wouter J., 1997. "Solving Dynamic Models With Aggregate Shocks And Heterogeneous Agents," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 355-386, June.
  21. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  22. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
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  28. repec:cup:macdyn:v:1:y:1997:i:2:p:355-86 is not listed on IDEAS
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