Citation

Discussion Paper Details

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Title: Asset Pricing with Limited Risk Sharing and Heterogeneous Agents

Author(s): Francisco J Gomes and Alexander Michaelides

Publication Date: February 2007

Keyword(s): equity premium, incomplete risk sharing, life-cycle models, limited stock market participation and preference heterogeneity

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: 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 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.

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Bibliographic Reference

Gomes, F and Michaelides, A. 2007. 'Asset Pricing with Limited Risk Sharing and Heterogeneous Agents'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6136