Distribution Risk and Equity Returns

56 Pages Posted: 7 Apr 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: December 2005

Abstract

In this paper 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 labour 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.

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

JEL Classification: E3, G1

Suggested Citation

Danthine, Jean-Pierre and Donaldson, John B. and Siconolfi, Paolo, Distribution Risk and Equity Returns (December 2005). CEPR Discussion Paper No. 5425, Available at SSRN: https://ssrn.com/abstract=895560

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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