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Asset Prices and Wealth Inequality

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  • Matthieu Gomez

    (Princeton University)

Abstract

This paper uses recently available data on the top of the wealth distribution to study the relationship between asset prices and wealth inequality. I document three stylized facts: (1) the share of wealth invested in equity increases sharply in the right tail of the wealth distribution, (2) when stock market returns are high, wealth inequality increases and (3) higher wealth inequality predicts lower future stock returns. These facts correspond to the basic predictions of asset pricing models with heterogeneous agents. Quantitatively, however, standard models with heterogeneous agents cannot fully capture the joint dynamics of asset prices and the wealth distribution. Augmenting the model with additional sources of fluctuations in wealth inequality, namely in the form of time-varying investment opportunities for wealthy households, is crucial to match the large fluctuations in wealth inequality and in asset prices.

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  • Matthieu Gomez, 2017. "Asset Prices and Wealth Inequality," 2017 Meeting Papers 1155, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1155
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    3. Veronesi, Pietro, 2019. "Heterogeneous Households under Uncertainty," CEPR Discussion Papers 13466, C.E.P.R. Discussion Papers.
    4. Guillermo Ordonez & Facundo Piguillem, 2022. "Saving Rates and Savings Ratios," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 365-381, October.
    5. Gârleanu, Nicolae & Panageas, Stavros, 2021. "What to expect when everyone is expecting: Self-fulfilling expectations and asset-pricing puzzles," Journal of Financial Economics, Elsevier, vol. 140(1), pages 54-73.
    6. Pietro Veronesi, 2019. "Heterogeneous Households under Uncertainty," NBER Working Papers 25448, National Bureau of Economic Research, Inc.
    7. Piguillem, Facundo & Ordoñez, Guillermo, 2020. "Savings Rates: Up or Down?," CEPR Discussion Papers 14662, C.E.P.R. Discussion Papers.
    8. Panageas, Stavros, 2020. "The Implications of Heterogeneity and Inequality for Asset Pricing," Foundations and Trends(R) in Finance, now publishers, vol. 12(3), pages 199-275, November.
    9. Schneider, Andrés, 2022. "Who should buy stocks when volatility spikes?," Journal of Financial Markets, Elsevier, vol. 60(C).

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