Uninsured expense shocks and equity premia

This paper analyzes the influences of uninsured expense shocks on the equity premium. We consider a consumption-based asset pricing model where agents face expected expense shocks. When the agents are hit by the shock, they have to consume all of their wealth and leave the financial markets. The numerical results from our calibrated model can match the mean equity premium, the mean risk-free rate, and the volatility of the equity premium observed in the data.