Asset Pricing with Endogenously Uninsurable Tail Risk

93 Pages Posted: 17 Sep 2018 Last revised: 26 Sep 2021

See all articles by Hengjie Ai

Hengjie Ai

University of Minnesota - Twin Cities - Carlson School of Management

Anmol Bhandari

University of Minnesota - Minneapolis - Department of Economics

Date Written: August 2018

Abstract

This paper studies asset pricing and labor market dynamics in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can fully commit; furthermore, owing to costly and unobservable retention effort, worker-firm relationships have endogenous durations. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In equilibrium, exposure to the tail risk generates higher aggregate risk premia and higher return volatility. Consistent with data, firm-level labor share predicts both future returns and pass-throughs of firm-level shocks to labor compensation.

Suggested Citation

Ai, Hengjie and Bhandari, Anmol, Asset Pricing with Endogenously Uninsurable Tail Risk (August 2018). NBER Working Paper No. w24972, Available at SSRN: https://ssrn.com/abstract=3244285

Hengjie Ai (Contact Author)

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Anmol Bhandari

University of Minnesota - Minneapolis - Department of Economics ( email )

1925 Fourth Street South
Minneapolis, MN
United States

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