Nonfundamental Asset Price Fluctuations and the Distributional Origins of Asset Premia
This paper investigates the impact of nonfundamental asset price fluctuations on asset premia, macroeconomic aggregates, and inequality. I build and estimate a heterogeneous-agent business-cycle model featuring incomplete markets, portfolio choice, and nonfundamental asset price shocks. The estimated model successfully replicates empirical equity and term premia. Household heterogeneity is key, as it limits risk sharing, leading households to demand sizable risk compensation. Half of the equity premium arises from fundamental macroeconomic shocks, while the other half compensates for risks from nonfundamental asset price fluctuations. Despite this, nonfundamental asset price shocks have limited effects on aggregate outcomes and standard inequality measures. Finally, I use the model to explain variation of asset premia over time and to assess the effects of monetary policy on asset premia.