The Market Price of Aggregate Risk and the Wealth Distribution / Hanno Lustig, Yi-Li Chien.

Format:

Book

Author/Creator:

Lustig, Hanno.

Contributor:

National Bureau of Economic Research.

Chien, Yi-Li.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11132.

NBER working paper series no. w11132

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

We introduce limited liability in a model with a continuum of ex ante identical agents who face aggregate and idiosyncratic income risk. These agents can trade a complete menu of contingent claims, but they cannot commit and shares in a Lucas tree serve as collateral to back up their state-contingent promises. The limited liability option gives rise to a second risk factor, in addition to aggregate consumption growth risk. This liquidity risk is created by binding solvency constraints, and it is measured by the growth rate of one moment of the wealth distribution. The economy is said to experience a negative liquidity shock when this growth rate is high and a large fraction of agents faces severely binding solvency constraints. The adjustment to the Breeden-Lucas stochastic discount factor induces substantial time variation in equity risk premia that is consistent with the data at business cycle frequencies.

Notes:

Print version record

February 2005.