Template-Type: ReDIF-Paper 1.0
Author-Name: Gleb Kozliakov
Author-Name-First: Gleb
Author-Name-Last: Kozliakov
Author-Name: Emile A. Marin
Author-Name-First: Emile A.
Author-Name-Last: Marin
Author-Name: Sanjay R. Singh
Author-Name-First: Sanjay R.
Author-Name-Last: Singh
Author-Workplace-Name: Department of Economics, University of California Davis
Title: Can Models with Idiosyncratic Risk Solve the Equity Premium Puzzle? Redux
Abstract: Can idiosyncratic risk explain the equity premium? We revisit this question using a novel measure of imperfect risk sharing, implied by a large class of heterogeneous agent models, constructed using household-level panel data. We identify a group of households - with relatively high income but low net-worth - whose consumption is sufficiently volatile and risky to explain 94% of the observed U.S. Sharpe ratio for an elasticity of intertemporal substitution of 0.2. In contrast, the consumption dynamics of high net-worth individuals predict a negative Sharpe ratio so do not constitute the relevant pricing factor, consistent with models featuring wealth motives.
Length: 42
File-URL: https://repec.dss.ucdavis.edu/files/p3konplgrnj5g49sjof6jt8z03qu/KMS_Latest.pdf
File-Format: application/pdf
Number: 377
Classification-JEL: G12, B52, E21
KeyWords: uninsurable idiosyncratic risk, heterogeneous agents, wealth dynamics, equity premium
Creation-Date: 20260312
Handle: RePEc:cda:wpaper:377