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A quantitative study of the role of wealth inequality on asset prices

  • Juan Carols Hatchondo
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    This paper studies the equilibrium properties of asset prices in a Lucas-tree model when agents display a concave coefficient of absolute risk tolerance. The latter introduces a role for wealth inequality, even under the presence of complete markets. The paper finds evidence suggesting that the role of wealth inequality on asset prices may be non-negligible. For the baseline calibration, the equity premium in the unequal economy is half a percentage point larger than the equity premium displayed by an egalitarian economy. The difference increases to one percentage point once we allow for the fact that agents tend to hold highly concentrated portfolios.

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    Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 05-12.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedrwp:05-12
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    1. repec:cup:macdyn:v:1:y:1997:i:2:p:387-422 is not listed on IDEAS
    2. Gollier, C., 1997. "Wealth Inequality and Asset Pricing," Papers 97.486, Toulouse - GREMAQ.
    3. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
    4. Krusell, Per & Smith, Anthony A., 1997. "Income And Wealth Heterogeneity, Portfolio Choice, And Equilibrium Asset Returns," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 387-422, June.
    5. Nicholas Barberis & Richard Thaler, 2002. "A Survey of Behavioral Finance," NBER Working Papers 9222, National Bureau of Economic Research, Inc.
    6. John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
    7. Zoran Ivkovich & Clemens Sialm & Scott Weisbenner, 2004. "Portfolio Concentration and the Performance of Individual Investors," NBER Working Papers 10675, National Bureau of Economic Research, Inc.
    8. Vincenzo Quadrini, 1997. "Entrepreneurship, saving and social mobility," Discussion Paper / Institute for Empirical Macroeconomics 116, Federal Reserve Bank of Minneapolis.
    9. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887 Elsevier.
    10. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    11. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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