International Journal of Business and Economics Volume 23, No. 1 June, 2024

The Importance of Income Uncertainty on the Relationship of Inequality with the Equity Risk Premium

Christos I. Giannikos

Baruch College & Graduate Center, City University of New York, USA

Hany Guirguis

The O’ Malley School of Business, Manhattan College

Georgios Koimisis

The O’ Malley School of Business, Manhattan College

Abstract

We empirically investigate the relationship between the equity risk premium, income inequality, and income uncertainty in the US economy over the period 1968-2019. Our model involves the examination of dynamic time-varying parameter responses of income inequality to income uncertainty shocks, while controlling for relevant economic and financial indicators. We also allow the relationship between income inequality and the premium to respond asymmetrically to high and low, as well as positive and negative changes in income uncertainty. Our results reveal that income inequality persistently increases the equity premium, regardless of the level of income uncertainty. However, income uncertainty reduces the positive effect of inequality on the premium only for high-income uncertainty, as it does not have any effect for low-income uncertainty.

Keywords：Equity Premium, Income Uncertainty, Inequality

JEL Classifications：C53, G12, D52, E4

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