Shifts in Sectoral Wealth Shares and Risk Premia: What Explains Them?
55 Pages Posted: 4 May 2017 Last revised: 27 Nov 2017
Date Written: November 23, 2017
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.
Keywords: Portfolio Allocation, Hedging Demand, Asset Pricing, Production, Equity Markets, Housing
JEL Classification: E21, E22, G11, G12
Suggested Citation: Suggested Citation