The Equity Premium and the One Percent

65 Pages Posted: 17 Mar 2014 Last revised: 31 May 2018

See all articles by Alexis Akira Toda

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics

Kieran James Walsh

University of California, Santa Barbara (UCSB) - Department of Economics

Date Written: May 24, 2018

Abstract

We show that in a general equilibrium model with heterogeneity in risk aversion or belief, shifting wealth from an agent who holds comparatively fewer stocks to one who holds more reduces the equity premium. Since empirically the rich hold more stocks than do the poor, inequality should predict subsequent excess stock market returns. Consistent with our theory, we find that when the income share of top earners in the U.S. rises, subsequent one year excess market returns significantly decline. This negative relation is robust to (i) controlling for classic return predictors such as the price-dividend and consumption-wealth ratios, (ii) predicting out-of-sample, and (iii) instrumenting with changes in estate tax rates. Cross-country panel regressions suggest that the inverse relation between domestic inequality and returns also holds outside of the U.S., with stronger results in relatively closed economies than in ones with low home bias (in which U.S. inequality predicts returns).

Keywords: equity premium, heterogeneous risk aversion, return prediction, wealth distribution, international equity markets

JEL Classification: D31, D52, D53, F30, G12, G17

Suggested Citation

Toda, Alexis Akira and Walsh, Kieran James, The Equity Premium and the One Percent (May 24, 2018). Available at SSRN: https://ssrn.com/abstract=2409969 or http://dx.doi.org/10.2139/ssrn.2409969

Alexis Akira Toda (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
Mail Code 0508
La Jolla, CA 92093-0508
United States

HOME PAGE: http://https://sites.google.com/site/aatoda111/

Kieran James Walsh

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

Santa Barbara, CA

Register to save articles to
your library

Register

Paper statistics

Downloads
627
Abstract Views
2,722
rank
42,237
PlumX Metrics