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Inequality, premium and the timing of resolution of uncertainty

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  • Koimisis, Georgios
  • Giannikos, Christos I.

Abstract

We incorporate Epstein-Zin preferences in an exchange economy with income uncertainty and examine the effect of inequality on the equity risk premium. When agents have preference for late resolution of uncertainty, inequality increases the premium for low income uncertainty and decreases the premium for large income uncertainty. When agents have preference for early resolution of uncertainty, inequality increases the equity premium even when the level of income uncertainty is large. Our results suggest that the time preference for resolution of uncertainty has an important effect on income uncertainty, which subsequently affects the relationship of inequality with the equity risk premium.

Suggested Citation

  • Koimisis, Georgios & Giannikos, Christos I., 2024. "Inequality, premium and the timing of resolution of uncertainty," Finance Research Letters, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012357
    DOI: 10.1016/j.frl.2023.104863
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    More about this item

    Keywords

    Equity premium; Time preferences; Inequality; Uninsurable idiosyncratic risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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