Distribution Risk and Equity Returns

EFA 2006 Zurich Meetings

FAME Research Paper No. 161

44 Pages Posted: 3 Jan 2006

See all articles by Jean-Pierre Danthine

Jean-Pierre Danthine

University of Lausanne - Institute of Banking and Finance (IBF); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

John B. Donaldson

Columbia Business School - Finance and Economics

Paolo Siconolfi

Columbia Business School - Finance and Economics

Multiple version iconThere are 3 versions of this paper

Date Written: February 2006

Abstract

In this chapter we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labor relations. We show that this view implies that income share variations represent a risk factor of first-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks. This study illustrates the benefits of applying a macroeconomic perspective to the study of financial return phenomena.

Keywords: Income shares, Distribution risk, equity premium, limited market participation

JEL Classification: E32, G12

Suggested Citation

Danthine, Jean-Pierre and Donaldson, John B. and Siconolfi, Paolo, Distribution Risk and Equity Returns (February 2006). EFA 2006 Zurich Meetings, FAME Research Paper No. 161, Available at SSRN: https://ssrn.com/abstract=873471 or http://dx.doi.org/10.2139/ssrn.873471

Jean-Pierre Danthine (Contact Author)

University of Lausanne - Institute of Banking and Finance (IBF) ( email )

Lausanne, 1015
Switzerland
+41 21 692 3485 (Phone)
+41 21 692 3335 (Fax)

HOME PAGE: http://www.hec.unil.ch/jdanthine/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

John B. Donaldson

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Paolo Siconolfi

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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