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How Does a Pay-as-you-go System Affect Asset Returns and the Equity Premium?

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  • Conny Olovsson

    (IIES, University of Stockholm)

Abstract

When applying a differences-in-differences approach, equity returns and the equity premium are both estimated to be more than four percentage points higher after the introduction of a pay-as-you-go (PAYGO) system. In a realistically calibrated model, the PAYGO system is also found to increase the returns and the premium, although the effects are smaller than in the data. Intuitively, the system lowers asset prices, which in turn increases the importance of dividend risk. Since only equity is subject to dividend risk, equity returns become more volatile relative to bond returns. (Copyright: Elsevier)

Suggested Citation

  • Conny Olovsson, 2014. "How Does a Pay-as-you-go System Affect Asset Returns and the Equity Premium?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 131-149, January.
    • Handle: RePEc:red:issued:11-135
    DOI: 10.1016/j.red.2013.02.006
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    More about this item

    Keywords

    Social security; asset prices; the equity premium puzzle;
    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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