Working Paper
A quantitative study of the role of wealth inequality on asset prices
Abstract: This paper studies the equilibrium properties of asset prices in a Lucas-tree model when agents display a concave coefficient of absolute risk tolerance. The latter introduces a role for wealth inequality, even under the presence of complete markets. The paper finds evidence suggesting that the role of wealth inequality on asset prices may be non-negligible. For the baseline calibration, the equity premium in the unequal economy is half a percentage point larger than the equity premium displayed by an egalitarian economy. The difference increases to one percentage point once we allow for the fact that agents tend to hold highly concentrated portfolios.
Keywords: Wealth; Asset pricing;
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Bibliographic Information
Provider: Federal Reserve Bank of Richmond
Part of Series: Working Paper
Publication Date: 2005
Number: 05-12