Handbook of the Equity Risk Premium

Discussion: Asset Prices and Intergenerational Risk Sharing: The Role of Idiosyncratic Earnings Shocks

Darrell Duffie

Graduate School of Business, Stanford University

The chapter is an extremely clever exploration of the implications of uninsurable labor income risk for intergenerational risk sharing and for conditional mean asset returns. As usual, the holy grail is a realistic explanation of the equity premium puzzle pointed out by Mehra and Prescott (1985). The path explored in this paper is based on incomplete markets and persistent idiosyncratic labor income shocks, along the lines of Constantinides and Duffie (1996) (CD). In this chapter, however, the authors relax the CD assumption that all investors have the same sorts of labor income ...