Events

We propose a general equilibrium model where heterogeneous risk-averse agents endogenously choose to enter or exit the stock market. We characterize the equilibrium in semi-closed form and present a novel conditional CCAPM. The model implies the empirically observed moderate procyclical variation in stock market participation. This time-variation gives rise to a countercyclical share of dividend in stockholders’ consumption, which drives the amount of stockholders’ consumption risk countercyclically, as opposed to the well-documented procyclical aggregate consumption risk. The price of consumption risk in our model is not only affected by consumption re-distribution of stockholders, but also by the time-variation in stock market participation. We find, under the assumption of time-invariant individual risk aversion, that the latter effect dominates the former, leading to a procyclical price of consumption risk. We provide empirical evidence for both the amount and price of consumption risk dynamics, supporting our theory. Overall, this article shows that it is the countercyclical stockholders’ amount of risk due to time-varying risk-sharing that explains time-varying risk premium, excess volatility, and the price-dividend ratio.