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A simple asset pricing model with heterogeneous agents, uninsurable labor income and limited stock market participation

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  • Ahn, Seryoong
  • Choi, Kyoung Jin
  • Koo, Hyeng Keun

Abstract

In this paper we study a simple two-period asset pricing model to understand the implications of uninsurable labor income risk and/or borrowing constraints, limited stock market participation, heterogeneous labor income volatilities, and heterogeneous preferences. We appraise the performance of each of these in matching moments of asset returns to the data and show that limited stock market participation generates a significantly large equity premium. We also show that the distribution of wealth between stock market participants and non-participants plays an important role in asset pricing, and that the effect of borrowing constraints on asset returns are similar to that of limited participation. Finally, we discuss the practical implications of our investigation, providing an appraisal of ongoing changes in asset returns.

Suggested Citation

  • Ahn, Seryoong & Choi, Kyoung Jin & Koo, Hyeng Keun, 2015. "A simple asset pricing model with heterogeneous agents, uninsurable labor income and limited stock market participation," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 9-22.
    • Handle: RePEc:eee:jbfina:v:55:y:2015:i:c:p:9-22
    DOI: 10.1016/j.jbankfin.2015.01.019
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    Cited by:

    1. Yosef Bonaparte & Frank J Fabozzi, 2017. "A flexible approach to estimate the equity premium," Applied Economics, Taylor & Francis Journals, vol. 49(59), pages 5940-5950, December.
    2. Koimisis, Georgios & Giannikos, Christos I., 2024. "Inequality, premium and the timing of resolution of uncertainty," Finance Research Letters, Elsevier, vol. 60(C).
    3. Yu, Edison G., 2018. "Dynamic market participation and endogenous information aggregation," Journal of Economic Theory, Elsevier, vol. 175(C), pages 491-517.
    4. Ripamonti, Alexandre & Silva, Diego & Moreira Neto, Eurico, 2018. "Asset Pricing and Asymmetric Information," MPRA Paper 87403, University Library of Munich, Germany.

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    More about this item

    Keywords

    Asset pricing; General equilibrium; Equity premium; Uninsurable labor income; Limited stock market participation; Heterogeneous preference; Borrowing constraint;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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