Idiosyncratic shocks drive up asset returns, impacting economy and welfare.
The article explores how individual shocks impact welfare and asset returns in a growing economy. By considering both economy-wide and individual shocks, the researchers found that individual shocks have a significant effect on risk and returns. They discovered that individual risk can explain a portion of the equity premium puzzle, with higher levels of risk aversion leading to greater impacts. Overall, the study highlights the importance of considering different types of risks in understanding economic growth, welfare, and asset pricing.