The stock market is driven by 'broke' people with high salaries, while the spending of the truly wealthy is actually a sign of bad returns.
April 2, 2026
Original Paper
Can Models with Idiosyncratic Risk Solve the Equity Premium Puzzle? Redux *
SSRN · 6404738
The Takeaway
Financial theory typically assumes that the wealthiest individuals, who own the most stock, are the ones whose behavior determines market risk premiums. This study finds the opposite: the spending of high-net-worth individuals doesn't match market logic at all, whereas a specific group of high-earners who haven't yet built wealth are the ones actually 'pricing' the market.
From the abstract
Can idiosyncratic risk explain the equity premium? We revisit this question using a novel measure of imperfect risk sharing, implied by a large class of heterogeneous-agent models, constructed using household-level panel data. We identify a group of households-with relatively high income but low net-worth-whose consumption is sufficiently volatile and risky to explain 94% of the observed U.S. Sharpe ratio. In contrast, the consumption dynamics of high net-worth individuals predict a negative Sha