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Nontraded income and the CAPM

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  • Philippe Weil

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

Asset pricing models that rely on the presence of non-tradable assets (such as human wealth) to solve the equity premium puzzle have to confront the effect of decreasing absolute risk aversion: rich investors, who according to micro data hold the stock market and whose behavior is the one that matters, at the margin, for the determination of equilibrium asset prices, are less risk averse, ceteris paribus, than the average consumer. This paper highlights a channel through which the effect of decreasing absolute risk aversion can be overcome: the existence of a positive correlation between the rates of return on traded assets and on the human capital of marginal investors.

Suggested Citation

  • Philippe Weil, 1994. "Nontraded income and the CAPM," SciencePo Working papers Main hal-03596965, HAL.
    • Handle: RePEc:hal:spmain:hal-03596965
    DOI: 10.1016/0014-2921(94)90127-9
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03596965
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    Cited by:

    1. Ohno, Hiroaki, 2009. "Incomplete market participation, endogenous endowment risks and welfare," Journal of Economics and Business, Elsevier, vol. 61(5), pages 392-403, September.

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