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Keywords:

  • market incompleteness;
  • equity premium puzzle;
  • precautionary saving;
  • income shocks;
  • recessions

Abstract:  This paper shows that the presence of persistent uninsurable risk concentrated in economic depressions has the potential to resolve two well-known asset pricing puzzles. It is also shown that the presence of such risk in more normal economic expansions and recessions is likely to be much less relevant in determining equilibrium asset prices.