Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle

Intergenerational Risk-Sharing via Social Security when Financial Markets Are Incomplete

“…Note that the¯rst 2 facts are motivated by the discussion in Constantinides et al (2001), the second two facts by Smetters (2001).…”

“…The remaining parameters (º; Ã; ¼ 1 ;¯) are chosen jointly so that the benchmark model competitive equilibrium delivers the following statistics, discussed in detail in Constantinides et al (2001) and Smetters (2000), which also consider OLG models with aggregate uncertainty, where agents live for only a small number of periods and thus a model period has to be interpreted as 20 years. Note that the¯rst 2 facts are motivated by the discussion in Constantinides et al (2001), the second two facts by Smetters (2001).…”

Market Organization and the Prices of Financial Assets*

“…In this section, I explore the impact of borrowing constraints in the context of the OLG model introduced in Constantinides et al (2002) and address its implications on the risk-free rate and the equity premium. The demographic structure of an OLG economy is a natural setting in which to address the impact of borrowing constraints.…”

“…In the Constantinides et al (2002) economy, consumers live for three periods. In the first period, a period of human capital acquisition, consumers receive a relatively low endowment income.…”

“…24 The model recognizes and addresses simultaneously, at least in part, the equity premium, the limited participation in the stock market and the demand for bonds. Constantinides et al (2002) calibrated the model to match the following eight targets: the average share of income going to labor; the average share of income going to the labor of the young; the average share of income going to interest on government debt; the coefficient of variation of the 20-year wage income of the middle-aged; the coefficient of variation of the 20-year aggregate income; the 20-year autocorrelation of the labor income; the 20-year autocorrelation of the aggregate income; and the 20-year cross-correlation of the labor income and the aggregate income. Since the length of one period in this model is 20 years, for all securities (equity, bond or consol), the annualized mean return is defined as the mean of (20) -1 ln(20-year holding period return); and the annualized standard deviation of the return is defined as the standard deviation of (20) -0.5 ln(20-year holding period return).…”