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Journal Articles Journal of Economic Dynamics and Control Year : 1992

Equilibrium Asset Prices with Undiversifiable Labor Income Risk

Abstract

In a two-period Lucas tree economy in which ex ante identical, but ex post dissimilar, agents face undiversifiable labor income risk, calibrating a (wrong) representative agent model results in overstating the equilibrium riskfree rate and in understating the equilibrium equity premium if the utility function exhibits decreasing absolute risk aversion and decreasing absolute prudence. These behavioral assumptions provide, as a consequence, a theoretical rationale for the often advanced conjecture that nontraded risk contributes to the solution of the riskfree rate and equity premium puzzles.

Dates and versions

hal-03393436 , version 1 (21-10-2021)

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Cite

Philippe Weil. Equilibrium Asset Prices with Undiversifiable Labor Income Risk. Journal of Economic Dynamics and Control, 1992, 16 (3-4), pp.769 - 790. ⟨10.1016/0165-1889(92)90057-L⟩. ⟨hal-03393436⟩

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