Working Paper: NBER ID: w1788
Authors: N. Gregory Mankiw
Abstract: This paper examines an economy in which aggregate shocks are not dispersed equally throughout the population. Instead, while these shocks affect all individuals ex ante, they are concentrated among a few ex post.The equity premium in general depends on the concentration of these aggregate shocks; it follows that one cannot estimate the degree of risk aversion from aggregate data alone. These findings suggest that the empirical usefulness of aggregation theorems for capital asset pricing models is limited.
Keywords: equity premium; aggregate shocks; risk aversion; asset pricing
JEL Codes: D52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| concentration of aggregate shocks (E19) | equity premium (G12) |
| absence of complete markets (D52) | individual consumption variability (D11) |
| individual consumption variability (D11) | equity premium (G12) |
| concentration of aggregate shocks (E19) | risk aversion estimation (D81) |
| concentration of aggregate shocks (third derivative positive) (E19) | equity premium (G12) |
| high concentration of aggregate shocks (E19) | equity premium (G12) |