Idiosyncratic risk fails to solve equity premium puzzle, study finds.
The study looked at whether models with individual risk can explain why stocks have higher returns than bonds. They found that when people are equally worried about risk, individual risk doesn't change the answer. But if individual risk depends on how the economy is doing, it can help explain the difference in returns. By looking at how much people earn instead of how much they spend, they found that even with a lot of individual risk, the model still doesn't match reality.