A simple asset pricing model with heterogeneous agents,uninsurable labor income and limited stock market participation

In this paper we study a simple two-period asset pricing model to understand the implications of uninsurable labor income risk and/or borrowing constraints, limited stock market participation, heterogeneous labor income volatilities, and heterogeneous preferences. We appraise the performance of each of these in matching moments of asset returns to the data and show that limited stock market participation generates a significantly large equity premium. We also show that the distribution of wealth between stock market participants and non-participants plays an important role in asset pricing, and that the effect of borrowing constraints on asset returns are similar to that of limited participation. Finally, we discuss the practical implications of our investigation, providing an appraisal of ongoing changes in asset returns.     

Home Bias in Emerging Bond and Stock Markets

In this paper, we empirically examine sizes and sources of home bias in both bond and equity markets for twenty emerging countries and twenty-two developed countries over the 2001-11 sample period. The average size of home bias in both bond and stock markets is found to be much larger in emerging countries than in developed countries. Using the explanatory variables in two categories of economic development and market performance, we employ dynamic panel data regression models to analyze major sources of home bias. The main results are the following: First, market performance factors generally affect home bias more strongly than do economic development factors. Second, market factors including market return, volatility, and liquidity support various hypotheses under informational asymmetries, such as return chasing, risk aversion, and flight to quality. Third, among macroeconomic factors, it is shown that real gross domestic product growth has negative effects and country leverage has positive effects on a specific home bias, backing up the size-bias and the flight-to-quality hypotheses, respectively. Finally, and perhaps most important in this paper, the effect of bond market performance on equity home bias is found to be significantly stronger than the effect of equity market performance on bond home bias from the market interaction model estimation, suggesting that a policy design needs to begin with increasing bond market efficiency to reduce equity market home bias.     

Nonseparable Preferences,Frisch Labor Supply,and the Consumption Multiplier of Government Spending: One Solution to a Fiscal Policy Puzzle

This paper proposes a theoretical explanation of the positive consumption multipliers of government spending often found in the data. The explanation requires two ingredients. First, labor demand expands (e.g., prices are sticky). Second, general nonseparable preferences over consumption and leisure should be such that the two goods are substitutes; that is, Frisch labor supply elasticity is lower than the constant‐consumption elasticity; this implies that constant‐consumption labor supply shifts left. Existing empirical evidence on the relative magnitudes of the two elasticities supports this hypothesis. The parametric conditions under which the result occurs are consistent with restrictions of concavity and noninferiority of consumption and leisure.