Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Philadelphia
Working Papers
Private risk premium and aggregate uncertainty in the model of uninsurable investment risk
Francisco Covas
Shigeru Fujita
Abstract

This paper studies cyclical properties of the private risk premium in a model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks, both of which are assumed to be highly persistent. The calibrated model matches highly skewed wealth and income distributions of entrepreneurs found in the Survey of Consumer Finances. The authors provide an accurate numerical solution to the model even though the model is shown to exhibit serious nonlinearities that are absent in incomplete market models with idiosyncratic labor income risk. The model is able to generate the aggregate private risk premium of 2-3 percent and the low risk-free rate. However, it generates very little variation in these variables over the business cycle, suggesting that the model lacks the ability to amplify aggregate shocks. ; Superseded by Working Paper 11-18


Download Full text
Cite this item
Francisco Covas & Shigeru Fujita, Private risk premium and aggregate uncertainty in the model of uninsurable investment risk, Federal Reserve Bank of Philadelphia, Working Papers 07-30, 2007.
More from this series
JEL Classification:
Subject headings:
For corrections, contact Beth Paul ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal