Distribution Risk and Equity Returns

THE EQUITY RISK PREMIUM, NORTH HOLLAND HANDBOOK OF FINANCE SERIES, R. Mehra, ed., North Holland, Amsterdam, 2006

44 Pages Posted: 19 Jun 2006

See all articles by John B. Donaldson

John B. Donaldson

Columbia Business School - Finance and Economics

Paolo Siconolfi

Columbia Business School - Finance and Economics

Jean-Pierre Danthine

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

Multiple version iconThere are 3 versions of this paper

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

JEL Classification: E32, G12

Suggested Citation

Donaldson, John B. and Siconolfi, Paolo and Danthine, Jean-Pierre, Distribution Risk and Equity Returns. THE EQUITY RISK PREMIUM, NORTH HOLLAND HANDBOOK OF FINANCE SERIES, R. Mehra, ed., North Holland, Amsterdam, 2006, Available at SSRN: https://ssrn.com/abstract=909301

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

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
143
Abstract Views
1,051
rank
79,792
PlumX Metrics