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Asset Pricing and the One Percent

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  • Alexis Akira Toda

    (UC San Diego)

  • Kieran Walsh

    (University of Virginia Darden School of Business)

Abstract

We find that when the income share of the top 1% income earners in the U.S. rises above trend by one percentage point, subsequent one year market excess returns decline on average by 5.6%. This negative relation remains strong and significant even when controlling for classic return predictors such as the price-dividend and the consumption-wealth ratios. To explain this stylized fact, we build a general equilibrium asset pricing model with heterogeneity in wealth and risk aversion across agents. Our model admits a testable moment condition and a novel two factor covariance pricing formula, where one factor is inequality. Intuitively, when wealth shifts into the hands of rich and risk tolerant agents, average risk aversion falls, pushing down the risk premium. Our model is broadly consistent with data and provides a novel positive explanation of both market excess returns over time and the cross section of returns across stocks.

Suggested Citation

  • Alexis Akira Toda & Kieran Walsh, 2015. "Asset Pricing and the One Percent," 2015 Meeting Papers 858, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:858
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    Cited by:

    1. Matthieu Gomez, 2017. "Asset Prices and Wealth Inequality," 2017 Meeting Papers 1155, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • F30 - International Economics - - International Finance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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