Junior is rich: bequests as consumption (Q883082): Difference between revisions

The authors explore the consequences for asset pricing of admitting a bequest motive into an otherwise standard overlapping generations economy where agents trade equity, a risk free asset and consol bonds. With low risk aversion, the calibrated model produces realistic values for the mean equity premium and the risk free rate, the variance of the equity premium, and the ratio of bequest to wealth. But, the variance of the risk free rate is very high. Security prices tend to be substantially higher in an economy with bequest as compared to an otherwise identical one where bequest are absent. The authors are able to keep the prices sufficiently low to generate reasonable returns and premia by stipulating that a portion of the bequests skips a generation and is received by the young.