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Social Security and the Equity Premium Puzzle

Author

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  • Olovsson, Conny

    (Institute for International Economic Studies, Stockholm University)

Abstract

This paper shows that social security may be an important factor in explaining the equity premium puzzle. In the absence of shortselling constraints, the young shortsell bonds to the middle-aged and buy equity. Social security reduces the bond demand of the middle-aged, thereby restricting the possibilities of the young to finance their equity purchases. They demand less equity and the return to equity goes up. Social security also increases the covariance between future consumption and the equity income of the young. The efect on the equity premium is substantial. In fact, a model with social security and borrowing constraints can generate a fairly realistic equity premium.

Suggested Citation

  • Olovsson, Conny, 2004. "Social Security and the Equity Premium Puzzle," Seminar Papers 729, Stockholm University, Institute for International Economic Studies.
    • Handle: RePEc:hhs:iiessp:0729
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    References listed on IDEAS

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    Cited by:

    1. Olovsson, Conny, 2010. "Quantifying the risk-sharing welfare gains of social security," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 364-375, April.

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    More about this item

    Keywords

    Asset prices; the equity premium puzzle; social security;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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