TY  - JOUR
AU  - Lustig,Hanno
AU  - Chien,Yi-Li
TI  - The Market Price of Aggregate Risk and the Wealth Distribution
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11132
PY  - 2005
Y2  - February 2005
UR  - http://www.nber.org/papers/w11132
L1  - http://www.nber.org/papers/w11132.pdf
N1  - Author contact info:
Hanno Lustig
UCLA Anderson School of Management
110 Westwood Plaza, Suite C413
Los Angeles, CA 90095-1481
Tel: 310/825-1011
Fax: 310/825-9528
E-Mail: hlustig@anderson.ucla.edu

Yi-Li Chien
403 West State Street
Krannert School of Management
Purdue University
West Lafayette
IN 47907
Tel: 765-494-4438
E-Mail: yilichien@gmail.com
AB  - We introduce limited liability in a model with a continuum of ex ante identical agents  who face aggregate and idiosyncratic income risk. These agents can trade a complete menu of contingent claims, but they cannot commit and shares in a Lucas tree serve as collateral to back up their state-contingent promises. The limited liability option gives rise to a second risk factor, in addition to aggregate consumption growth risk. This liquidity risk is created by binding solvency constraints, and it is measured by the growth rate of one moment of the wealth distribution. The economy is said to experience a negative liquidity shock when this growth rate is high and a large fraction of agents faces severely binding solvency constraints.  The adjustment to the Breeden-Lucas stochastic discount factor induces substantial time variation in equity risk premia that is consistent with the data at business cycle frequencies.
ER  -