Shifts in Sectoral Wealth Shares and Risk Premia: What Explains Them?

We empirically show across several broad asset classes that sectoral wealth shares do not positively correlate with their risk premia---a first-order prediction of canonical equilibrium models. We then analyze the roles mean-variance and hedging demand play in accounting for sectoral shifts within a two-sector production economy that features imperfect substitutability across goods and demand shocks. With these two features, the model's performance improves, yet still unsatisfactorily accounts for sectoral shifts in wealth shares. We argue that equilibrium models thus face a challenge to explain the cross-sectional evolution of wealth shares and investors' incentives to hold them over time.