The Equity Premium and the Concentration of Aggregate Shocks

17 Pages Posted: 8 Jul 2004 Last revised: 21 Nov 2022

See all articles by N. Gregory Mankiw

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: 1986

Abstract

This paper examines an economy in which aggregate shocks are not dispersed equally throughout the population. Instead, while these shocks affect all individuals ex ante, they are concentrated among a few ex post.The equity premium in general depends on the concentration of these aggregate shocks; it follows that one cannot estimate the degree of risk aversion from aggregate data alone. These findings suggest that the empirical usefulness of aggregation theorems for capital asset pricing models is limited.

Suggested Citation

Mankiw, N. Gregory, The Equity Premium and the Concentration of Aggregate Shocks (1986). NBER Working Paper No. w1788, Available at SSRN: https://ssrn.com/abstract=338833

N. Gregory Mankiw (Contact Author)

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