IDEAS home Printed from https://ideas.repec.org/p/san/cdmacp/0502.html
   My bibliography  Save this paper

Uninsured Risks, Loan Contracts and the Declining Equity Premium

Author

Listed:
  • Sanjay Banerjee
  • Parantap Basu

Abstract

Using a two period model with moral hazard and uninsured risk, we argue that the decline in equity premium from its historically high level is due to a gradual elimination of barriers to universal banking. The loan contracts set up by financial intermediaries became more complete in nature with the advent of universal banking in the 90s following the Gramm-Leach-Billy Act. Hence, it is the nature of the loan contracts, not just the borrowing constraint and uninsured risks that is more fundamental in explaining the size of the equity premium.

Suggested Citation

  • Sanjay Banerjee & Parantap Basu, 2005. "Uninsured Risks, Loan Contracts and the Declining Equity Premium," CDMA Conference Paper Series 0502, Centre for Dynamic Macroeconomic Analysis.
    • Handle: RePEc:san:cdmacp:0502
    as

    Download full text from publisher

    File URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0502.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-240, April.
    3. George M. Constantinides & John B. Donaldson & Rajnish Mehra, 2002. "Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 269-296.
    4. Kahn, James A., 1990. "Moral hazard, imperfect risk-sharing, and the behavior of asset returns," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 27-44, August.
    5. Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2008. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1653-1687, July.
    6. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938, Elsevier.
    7. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-487, June.
    8. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina, 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Fall), pages 3-19.
    9. Heaton, John & Lucas, Deborah, 1997. "Market Frictions, Savings Behavior, And Portfolio Choice," Macroeconomic Dynamics, Cambridge University Press, vol. 1(1), pages 76-101, January.
    10. Kocherlakota, Narayana R., 1998. "The effects of moral hazard on asset prices when financial markets are complete," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 39-56, February.
    11. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Banerji, Sanjay & Basu, Parantap, 2015. "Borrower's moral hazard, risk premium, and welfare: A comparison of universal and stand-alone banking systems," The Journal of Economic Asymmetries, Elsevier, vol. 12(1), pages 61-72.
    2. Fernandez, Pablo & Aguirreamalloa, Javier & Liechtenstein, Heinrich, 2009. "The equity premium puzzle: High required equity premium, undervaluation and self fulfilling prophecy," IESE Research Papers D/821, IESE Business School.
    3. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
    4. Walentin Karl, 2010. "Earnings Inequality and the Equity Premium," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-23, November.
    5. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
    6. George M. Constantinides, 2002. "Rational Asset Prices," Journal of Finance, American Finance Association, vol. 57(4), pages 1567-1591, August.
    7. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    8. George M. Constantinides, 2006. "Market Organization And The Prices Of Financial Assets," Manchester School, University of Manchester, vol. 74(s1), pages 1-23, September.
    9. Filippo Taddei, 2007. "Equity Premium: Interaction of Belief Heterogeneity and Distribution of Wealth?," Carlo Alberto Notebooks 67, Collegio Carlo Alberto.
    10. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887, Elsevier.
    11. Roelof Salomons, 2008. "A Theoretical And Practical Perspective On The Equity Risk Premium," Journal of Economic Surveys, Wiley Blackwell, vol. 22(2), pages 299-329, April.
    12. Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 793-824, August.
    13. Aras, Atilla, 2020. "Solution to the Equity Premium Puzzle Using the Sufficiency Factor of the Model," OSF Preprints b9afj, Center for Open Science.
    14. Andrei Semenov, 2003. "High-Order Consumption Moments and Asset Pricing," Working Papers 2003_4, York University, Department of Economics, revised Jan 2005.
    15. John Donaldson & Rajnish Mehra, 2007. "Risk Based Explanations of the Equity Premium," NBER Working Papers 13220, National Bureau of Economic Research, Inc.
    16. Rieger, Marc Oliver & Wang, Mei, 2012. "Can ambiguity aversion solve the equity premium puzzle? Survey evidence from international data," Finance Research Letters, Elsevier, vol. 9(2), pages 63-72.
    17. Marc Oliver Rieger & Thorsten Hens & Mei Wang, 2013. "International Evidence on the Equity Premium Puzzle and Time Discounting," Multinational Finance Journal, Multinational Finance Journal, vol. 17(3-4), pages 149-163, September.
    18. Kim, Yun-Yeong, 2021. "Composite-asset-risk approach to solving the equity premium puzzle," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 200-216.
    19. Kris Jacobs, 2002. "The Rate of Risk Aversion May Be Lower Than You Think," CIRANO Working Papers 2002s-08, CIRANO.
    20. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938, Elsevier.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:san:cdmacp:0502. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: The School of Economics and Finance (email available below). General contact details of provider: https://edirc.repec.org/data/cdstauk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.