Equilibrium Asset Prices with Undiversifiable Labor Income Risk

26 Pages Posted: 4 Jan 2007

See all articles by Philippe Weil

Philippe Weil

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: January 1992

Abstract

In a two-period Lucas tree economy in which ex ante identical, but ex post dissimilar, agents face undiversifiable labor income risk, calibrating a (wrong) representative agent model results in overstating the equilibrium riskfree rate and in understanding the equilibrium equity premium if the utility function exhibits decreasing absolute risk aversion and decreasing absolute prudence. These behavioral assumptions provide, as a consequence, a theoretical rationale for the often advanced conjecture that non-traded risk contributes to the solution of the riskfree rate and equity premium puzzles.

Suggested Citation

Weil, Philippe, Equilibrium Asset Prices with Undiversifiable Labor Income Risk (January 1992). NBER Working Paper No. w3975. Available at SSRN: https://ssrn.com/abstract=476136

Philippe Weil (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
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Belgium
+32 2 650 4220 (Phone)
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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United States

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