Risk Sharing and Asset Returns in Stochastic Endogenous Growth Models
Wilson, Bonnie Erin
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https://hdl.handle.net/2142/85658
Description
Title
Risk Sharing and Asset Returns in Stochastic Endogenous Growth Models
Author(s)
Wilson, Bonnie Erin
Issue Date
1999
Doctoral Committee Chair(s)
Tom Krebs
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Language
eng
Abstract
In chapter three, the asset return and business cycle implications of a stochastic endogenous growth model with heterogeneous agents and incomplete markets are analyzed. The asset market structure of the economy is incomplete in the sense that households in the model economy can trade shares in a stock company and a risk free bond in financial markets, but cannot (directly) insure against idiosyncratic production (income) risk. A simple characterization of the unique (constrained efficient) equilibrium is provided. The calibrated model economy is as successful as the standard real business cycle model in replicating the comovements of aggregate output, consumption, and investment, but strictly outperforms it along the asset return dimension. More specifically, the model generates a significant equity premium if idiosyncratic production (income) risk is large during times of economic contraction and stock market decline.
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