Portal de Periódicos da CAPES

Asset Pricing with Limited Risk Sharing and Heterogeneous Agents

2007; Oxford University Press; Volume: 21; Issue: 1 Linguagem: Inglês

10.1093/rfs/hhm063

1465-7368

Francisco Gomes, Alexander Michaelides,

Economic theories and models

We solve 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 borrowing constraints and (realistically) calibrated life-cycle earnings profiles, subject to both aggregate and idiosyncratic shocks.We show that it is challenging to simultaneously match aggregate quantities (asset prices) and individual quantities (asset allocations).Furthermore, limited participation has a negligible impact on the risk premium, contrary to the results of models where it is imposed exogenously.