Tax Uncertainty, Risk Sharing, and Asset Prices

29 Pages Posted: 20 Sep 2024

See all articles by Hyun Soo Doh

Hyun Soo Doh

Hanyang University

Hoonsuk Park

University of Melbourne - Faculty of Business and Economics

Date Written: August 22, 2024

Abstract

We develop a general equilibrium overlapping generations model to analyze the impact of tax uncertainty on asset prices. While redistributive taxation alone cannot generate risk premiums in complete markets with perfect risk sharing, we show that when combined with imperfect inter-generational risk sharing and recursive preferences, uncertain tax policies produce significant equity premiums. This result shows that tax uncertainty can create endogenous aggregate risk, beyond their direct effect on individual investment decisions. Our model with stochastic taxation successfully captures key stylized facts regarding the equity premium, interest rates, stock return volatility, and the price-dividend ratio.

Keywords: Tax Policy, Redistribution, Risk Sharing, Equity Premium, Aggregate Risk

JEL Classification: G10, G12

Suggested Citation

Doh, Hyun Soo and Park, Hoonsuk, Tax Uncertainty, Risk Sharing, and Asset Prices (August 22, 2024). Available at SSRN: https://ssrn.com/abstract=4933467 or http://dx.doi.org/10.2139/ssrn.4933467

Hyun Soo Doh

Hanyang University ( email )

Hoonsuk Park (Contact Author)

University of Melbourne - Faculty of Business and Economics ( email )

Victoria, 3010
Australia

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