Working Papers

Heterogeneous-agent asset pricing

Abstract: This paper studies the importance of idiosyncratic endowment shocks for aggregate asset prices in continuous time. My generalized framework accommodates jumps and heterogeneous recursive preferences. I show that countercyclical cross-sectional risk is irrelevant to risk premia if and only if all agents have identical, time-additive power utility and cross-sectional risk is uncorrelated with aggregate consumption risk. It always affects the riskfree rate and equity volatility. I calibrate a general-equilibrium model in which numerous agents face uninsurable idiosyncratic human-capital disasters. Using Social Security Administration income data, I show that time-varying cross-sectional income skewness is an important driver of asset price dynamics.

First draft: March 2021 | Current version: March 2022

Sovereign default and the decline in interest rates

with Max Miller and Jessica A. Wachter

Abstract: Sovereign debt yields have declined dramatically over the last half-century. Standard explanations, including aging populations and increases in asset demand from abroad, encounter difficulties when confronted with the full range of evidence. We propose an explanation based on a decline in inflation and default risk, which we argue is more consistent with the long-run nature of the interest rate decline. We show that a model with investment, inventory storage, and sovereign default captures the decline in interest rates, the stability of equity valuation ratios, and the recent reduction in investment and output growth coinciding with the binding zero lower bound.

First draft: July 2020 | Current version: April 2022

Who hedges interest-rate risk? Implications for wealth inequality

with Sylvain Catherine, Max Miller, and Natasha Sarin

Abstract: We present a life-cycle model in which households can invest in short- or long-term assets to hedge against interest-rate risk. Our model matches important stylized facts. First, the share of long-term assets in households' wealth is hump-shaped over the life-cycle. Within cohorts, it increases with wealth and earnings. Second, wealth inequality grows when interest rates fall, but only when wealth does not include the value of Social Security. Hedging demand against interest-rate risk can explain 40% of long-run changes in wealth inequality since 1960.

First draft: May 2022 | Current version: May 2022