Idiosyncratic risk and volatility bounds, or can models with idiosyncratic risk solve the equity premium puzzle?
By: Martin Lettau.
Contributors: Federal Reserve Bank of New York.
Series: Staff reports ;; no. 130; Staff reports (Federal Reserve Bank of New York : Online) ;; no. 130.
Publisher: Federal Reserve Bank of New York
Published: 2001
Place of publication: [New York, N.Y.]
Language: eng
Format: Electronic resource
Description: "This paper uses Hansen and Jagannathan's (1991) volatility bounds to evaluate models with idiosyncratic consumption risk.  I show that idiosyncratic risk does not change the volatility bounds at all when consumers have CRRA preferences and the distribution of the idiosyncratic shock is independent of the aggregate state.  Following Mankiw (1986), I thenshow that idiosyncratic risk can help to enter the bounds when idiosyncratic uncertainty depends on the aggregate state of the economy.  Since individual consumption data are notreliable, I compute an upper bound of the volatility bounds using individual income dataand assume that agents have to consume their endowment.  I find that the model does notpass the Hansen and Jagannathan test even for very volatile idiosyncratic income data"--Federal Reserve Bank of New York web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 2/22/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.