Junior Can't Borrow:  A New Perspective on the Equity Premium Puzzle

Constantinides, George M.; Donaldson, John B.; Mehra, Rajnish

doi:10.2139/ssrn.206568

Cited by 208 publications

(346 citation statements)

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“…One sign of the importance of increased earnings inequality is that stockholders' share of aggregate labor income increased 11 percent more than stockmarket participation, during the period 1962-2000. 6 Furthermore, we note that the di¤erence between these two fractions is closely related to the earnings share of the top 10% earnings individuals. This is illustrated in Figure 3.…”

Section: Introductionmentioning

confidence: 78%

“…5 Because of lack of good panel data (SCF is not a panel) an exact decomposition of these two e¤ects is impossible without making strong assumptions regarding the earnings of the households that switched groups (became stockholders or non-stockholders) during this period. 6 Given that average earnings of non-stockholders in 1962 was roughly half that of stockholders, increased participation would plausibly pull down the average earnings of stockholders. As seen in Table 1, any such e¤ect was quantitatively dwarfed by the increase in earnings inequality.…”

Section: Introductionmentioning

confidence: 99%

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Earnings Inequality and the Equity Premium

Walentin

2010

The B.E. Journal of Macroeconomics

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We present data from the Survey of Consumer Finances showing that the increased earnings (labor income) inequality, in combination with increased stockmarket participation, has roughly doubled stockholders' share of aggregate labor income in the last four decades. We explore the impact of the increase in this share on returns to equity and returns to a risk-free bond in a model with limited stockmarket participation, labor income and borrowing constraints. The main result is that the increase in stockholders'share of aggregate labor income has lead to 130 basis points (45 percent) decrease in the ex ante equity premium (i.e. the discount rate applied to equity). The reason for this change is that the increase in stockholders' share of aggregate labor income leads to a change in income composition for stockholders -a decrease in the fraction of their income that consists of dividend income. This reduces the covariance between stockholder's total income growth and dividend growth.The size of the decrease in the equity premium implied by our model roughly coincides with the historical change in the post-1951 equity premium implied by the simple dividend growth model in Fama and French (2002).

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Section: Introductionmentioning

confidence: 78%

Section: Introductionmentioning

confidence: 99%

Earnings Inequality and the Equity Premium

Walentin

2010

The B.E. Journal of Macroeconomics

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“…However, they do not address the e¤ect of borrower's moral hazard on the stock market premium which is the central aim of our paper. 8 In contrast with the extant literature dealing with borrowing constraint (Constantinides et al, 2002), our exercise highlights the role of the banking environment in explaining the size of the premium. Our model has a direct bearing on a growing body of literature exploring the link between asset market frictions and the premium.…”

Section: Introductionmentioning

confidence: 85%

“…Constantinides and Du¢ e (1996), and Lucas (1996, 1997) looked for explanations for a high premium in terms of incomplete markets where individuals fail to insure their income in the presence of permanent shocks. 9 In contrast with Constantinides et al (2002), in our model such an incentive constraint makes the borrowing constraint endogenous.…”

Section: Introductionmentioning

confidence: 97%

Borrower's moral hazard, risk premium, and welfare: A comparison of universal and stand-alone banking systems

Banerji

Basu

2015

The Journal of Economic Asymmetries

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Publisher's copyright statement: NOTICE: this is the author's version of a work that was accepted for publication in The Journal of Economic Asymmetries. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be re ected in this document. Changes may have been made to this work since it was submitted for publication. A de nitive version was subsequently published in The Journal of Economic Asymmetries, 12, 1, June 2015, 10.1016/j.jeca.2015.01.003. Additional information:Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-pro t purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. Abstract Does the uni…cation of retail and investment banking necessarily heighten risk in …-nancial markets? Using a simple two period intertemporal model with borrower's moral hazard and uninsured risk, we argue that the integration in …nancial service markets under universal banking could give rise to a greater risk sharing arrangement. This could eliminate the stock market premium attributed to borrower's moral hazard. Absent any other frictions, we show that there is an unambiguous output and welfare gain from switching to a universal banking system from retail banking because of this e¢ cient risk sharing. This welfare gain is higher in economies prone to greater information friction caused by borrower's moral hazard.

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“…This is how OLG models perform differently from ILA when intertemporal allocations are linked to asset markets: the lifecycle feature in OLG is said to play a crucial role in improving the consumption based asset pricing, according to Bohm et al (2008). Some documents include Constantinides et al (2002) for imperfect credit market for the young, and Storesletten, Telmer and Yaron (2007) for idiosyncratic risks related with age (Note 8). Many authors argue a general advantage of OLG over ILA in other areas, too.…”

Section: Introductionmentioning

confidence: 99%

Asset Pricing Kernels in an OLG Economy with Housing

Park

2015

IJEF

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This paper introduces an asset pricing model with housing and explores properties of an asset pricing kernel using housing service as a numeraire in an OLG economy. When there is non-separable utility over consumption goods and housing services, the model generates not only the new type of risk known as composition risk, but also a new type of pricing kernel. This paper derives this novel pricing kernel using housing service as the numeraire and studies its property by exploring its relationship with the standard pricing kernel, which uses consumption as the numeraire. A simulation result for steady state asset prices exhibits a certain interrelationship among many consumer parameters in asset pricing with housing.

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Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle

Cited by 208 publications

References 50 publications

Earnings Inequality and the Equity Premium

Earnings Inequality and the Equity Premium

Borrower's moral hazard, risk premium, and welfare: A comparison of universal and stand-alone banking systems

Asset Pricing Kernels in an OLG Economy with Housing

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