Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/209994 
Year of Publication: 
2011
Series/Report no.: 
Working Paper No. 2011/18
Publisher: 
Norges Bank, Oslo
Abstract: 
This paper investigates how concentrated ownership of capital influences the pricing of risky assets in a production economy. The model is designed to approximate the skewed distribution of wealth and income in U.S. data. I show that concentrated ownership significantly magnifies the equity risk premium relative to an otherwise similar representative-agent economy because the capital owners' consumption is more strongly linked to volatile dividends from equity. A temporary shock to the technology for producing new capital (an "investment shock") causes dividend growth to be much more volatile than aggregate consumption growth, as in long-run U.S. data. The investment shock can also be interpreted as a depreciation shock, or more generally, a financial friction that affects the supply of new capital. Under power utility with a risk aversion coeffecient of 3.5, the model can roughly match the first and second moments of key asset pricing variables in long-run U.S. data, including the historical equity risk premium. About one-half of the model equity premium is attributable to the investment shock while the other half is attributable to a standard productivity shock. On the macro side, the model performs reasonably well in matching the business cycle moments of aggregate variables, including the pro-cyclical movement of capital's share of total income in U.S. data.
Subjects: 
asset pricing
equity premium
term premium
investment shocks
real business cycles
wealth inequality
JEL: 
E25
E32
E44
G12
O40
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-634-9
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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