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Uninsurable Risk and Financial Market Puzzles

Author

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  • Basu, Parantap
  • Semenov, Andrei
  • Wada, Kenji
Abstract
Following Kocherlakota and Pistaferri (2009), we consider two forms of incomplete risk sharing in economies with consumer heterogeneity: (a) where agents are unable to insure their consumption against idiosyncratic skill shocks and (b) where idiosyncratic shocks to skills can be partially insured by striking long term insurance contract with truth revelation constraint. When considering the equity premium, currency premium, risk-free rate, and consumption-real exchange rate puzzles in an integrated framework, we find empirical evidence that although the pricing kernel associated with (a) outperforms the complete risk-sharing stochastic discount factor and the pricing kernel associated with (b), it is still unable to jointly resolve these asset-pricing anomalies.

Suggested Citation

  • Basu, Parantap & Semenov, Andrei & Wada, Kenji, 2009. "Uninsurable Risk and Financial Market Puzzles," MPRA Paper 23351, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:23351
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    Cited by:

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    2. Wilson, Matthew S., 2020. "Disaggregation and the equity premium puzzle," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 1-18.
    3. Parantap Basu & Sigit Sulistiyo Wibowo, 2015. "An Empirical Investigation of Risk Sharing among Indonesian Households," CEMAP Working Papers 2015_02, Durham University Business School.
    4. Elie Appelbaum & Parantap Basu, 2010. "A new methodology for studying the equity premium," Annals of Operations Research, Springer, vol. 176(1), pages 109-126, April.

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    More about this item

    Keywords

    Currency Premium; Equity Premium; Exchange Rate.;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G00 - Financial Economics - - General - - - General

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