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Distribution Risk and Equity Returns

  • Jean-Pierre Danthine
  • John B. Donaldson
  • Paolo Siconolfi

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 Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 05.10.

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Length: 53 pages
Date of creation: Nov 2005
Date of revision:
Publication status: Published in The Equity Risk Premium, R. Mehra, ed., North Holland Handbook of Finance Series, Elsevier, North Holland, Amsterdam, 2008
Handle: RePEc:lau:crdeep:05.10
Contact details of provider: Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.20
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
Email:


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  1. 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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  9. Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
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  14. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
  15. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  16. Ellen R. McGrattan & Edward C. Prescott, 2000. "Is the stock market overvalued?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 20-40.
  17. Michele Boldrin & Adrian Peralta-Alva, 2009. "What happened to the US stock market? Accounting for the last 50 years," Working Papers 2009-042, Federal Reserve Bank of St. Louis.
  18. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
  19. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  20. 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.
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