Review of Financial Studies Vol. 21 No. 1 2008
Asset Pricing with Limited Risk Sharing and Heterogeneous Agents
Abstract
[We develop a model with incomplete markets and heterogeneous agents that generates a large equity premium, while simultaneously matching stock market participation and individual asset holdings. The high risk-premium is driven by incomplete risk sharing among stockholders, which results from the combination of aggregate uncertainty, borrowing constraints, and a (realistically) calibrated life-cycle earnings profile subject to idiosyncratic shocks. We show that it is challenging to simultaneously match asset pricing moments and individual portfolio decisions, while limited participation has a negligible impact on the risk-premium, contrary to the results of models where it is imposed exogenously.]
- Volume
- 21
- Issue
- 1
- Pages
- 415-449
- Sources
- bibtex:phds-export.bib