Asset Market Participation, Redistribution, and Asset Pricing

Abstract

The dynamics of consumption inequality is key to understanding asset pricing and its connection with macroeconomic fluctuations. We document marked heterogeneity in the transmission of different aggregate shocks to the consumption and income of U.S. assetholders relative to non-assetholders. Factor-share shocks redistributing income from labor to capital generate strongly procyclical relative consumption and income, and drive the time-variation in expected stock returns. A limited-participation model rationalizes these findings, highlighting that asset prices mostly reflect risk from factor-share shocks, despite a modest contribution to macroeconomic fluctuations. This explains the renowned challenge of modeling links between asset prices and the macroeconomy.

Keywords: Consumption, Income, Heterogeneity, Limited participation, Asset pricing.

JEL Classification: D31, E13, E21, E25, E32, E44, G12, G51