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Asset Pricing With Endogenously Uninsurable Tail Risk
Author(s) -
Ai Hengjie,
Bhandari Anmol
Publication year - 2021
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta15142
Subject(s) - unobservable , economics , systematic risk , capital asset pricing model , earnings , risk premium , volatility (finance) , asset (computer security) , consumption based capital asset pricing model , commit , monetary economics , financial economics , econometrics , finance , computer security , database , computer science
This paper studies asset pricing and labor market dynamics when idiosyncratic risk to human capital is not fully insurable. Firms use long‐term contracts to provide insurance to workers, but neither side can fully commit; furthermore, owing to costly and unobservable retention effort, worker‐firm relationships have endogenous durations. Uninsured tail risk in labor earnings arises as a part of an optimal risk‐sharing scheme. In equilibrium, exposure to the tail risk generates higher aggregate risk premia and higher return volatility. Consistent with data, firm‐level labor share predicts both future returns and pass‐throughs of firm‐level shocks to labor compensation.