NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Equilibrium Asset Prices With Undiversifiable Labor Income Risk

Philippe Weil

NBER Working Paper No. 3975
Issued in January 1992
NBER Program(s):Asset Pricing

In a two-period Lucas tree economy in which ex ante identical, but ex post dissimilar, agents face undiversifiable labor income risk, calibrating a (wrong) representative agent model results in overstating the equilibrium riskfree rate and in understanding the equilibrium equity premium if the utility function exhibits decreasing absolute risk aversion and decreasing absolute prudence. These behavioral assumptions provide, as a consequence, a theoretical rationale for the often advanced conjecture that non-traded risk contributes to the solution of the riskfree rate and equity premium puzzles.

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Document Object Identifier (DOI): 10.3386/w3975

Published: Journal of Economic Dynamics and Control, Vol. 16, nos. 3/4 (1992): 769-790 . citation courtesy of

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