Working Paper: CEPR ID: DP13466
Authors: Pietro Veronesi
Abstract: I characterize a dynamic economy under general distributions of households’ risk tolerance, endowments, and beliefs about long-term growth. As the economy expands and the stock market rises (a) the fraction of households with declining consumption-share increases; (b) the wealth-share of high risk-tolerant households increases; (c) richer households’ wealth display a higher CAPM beta; and (d) households’ portfolios change qualitatively. A log-utility investor for instance borrows in contractions but lends in expansions. Variations in uncertainty and expected growth generate trading volume due to risk sharing. Higher uncertainty increases stock prices, risk premiums, volatility, wealth inequality and the dispersion of portfolio holdings, consistently with the events in the late 1990s.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic expansion (F43) | changes in consumption behavior among households (D12) |
| economic growth (O49) | wealth distribution changes (D39) |
| wealth levels (D31) | risk exposure in asset markets (G19) |
| economic conditions (E66) | investment behavior (G11) |
| increased uncertainty (D89) | market behavior (D40) |
| uncertainty (D89) | market dynamics and wealth inequality (F61) |
| economic conditions and risk preferences (D11) | portfolio allocations across households (G59) |
| uncertainty (D89) | wealth inequality (D31) |