Risk-Sharing Externalities and Its Implications for Equity Premium in an Infinite-Horizon Economy

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Title:Risk-Sharing Externalities and Its Implications for Equity Premium in an Infinite-Horizon Economy
Creators:
Ohno, Hioraki
Journal or Publication Title:
AUCO Czech Economic Review, 4, 2, pp. 168-189
Uncontrolled Keywords:Risk-sharing externalities, endogenous income risks, incomplete market participation, asset prices

Abstract

This paper examines asset prices when risk-sharing externalities are incorporated into an infinite-horizon model where consumers are exposed to the endogenous income risks. It is shown that there exist multiple types of equilibria depending on the degree of market participation. Under incomplete participation, income risks cannot be fully diversified as they induce higher precautionary savings, which are conducive in turn to higher asset prices. However, the exposure to additional dividend risks can lead at the same time to a lower demand for risky assets. The aggregate effect is an increase in the equity risk premium and a decrease in the risk-free rate. Thus, the evidence suggests that the equity premium and risk-free rate puzzles can be partly explained by infinite-horizon models with incomplete market participation.

Official URL: http://www.ceeol.com/aspx/issuedetails.aspx?issueid=770E8657-FF06-4238-B4AE-70B7B8ABF697&articleid=74825CDB-1FAC-480D-B78A-E174FE8CB16B

Title:Risk-Sharing Externalities and Its Implications for Equity Premium in an Infinite-Horizon Economy
Creators:
Ohno, Hioraki
Uncontrolled Keywords:Risk-sharing externalities, endogenous income risks, incomplete market participation, asset prices
Subjects:H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
H Social Sciences > HF Commerce
Divisions:Section of external journals > AUCO Czech Economic Review
Journal or Publication Title:AUCO Czech Economic Review
Volume:4
Number:2
Page Range:pp. 168-189
ISSN:1802-4696
Publisher:Charles University
Related URLs:
URLURL Type
http://auco.cuni.czPublisher
http://avi.lib.cas.cz/node/183Publisher
ID Code:6175
Item Type:Article
Deposited On:01 Jul 2010 17:40
Last Modified:01 Jul 2010 15:40

Citation

Ohno, Hioraki (2010) Risk-Sharing Externalities and Its Implications for Equity Premium in an Infinite-Horizon Economy. AUCO Czech Economic Review, 4 (2). pp. 168-189. ISSN 1802-4696

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