Asset Prices and Wealth Inequality∗

This paper uses recently available data on the top of the wealth distribution to study the relationship between asset prices and wealth inequality. I document three stylized facts: (1) the share of wealth invested in equity increases sharply in the right tail of the wealth distribution, (2) when stock market returns are high, wealth inequality increases and (3) higher wealth inequality predicts lower future stock returns. These facts correspond to the basic predictions of asset pricing models with heterogeneous agents. Quantitatively, however, standard models with heterogeneous agents cannot fully capture the joint dynamics of asset prices and the wealth distribution. Augmenting the model with additional sources of fluctuations in wealth inequality, namely in the form of time-varying investment opportunities for wealthy households, is crucial to match the observed fluctuations in wealth inequality and in asset prices. ∗I am indebted to Valentin Haddad, Atif Mian, Wei Xiong and Motohiro Yogo for their invaluable guidance. I am also grateful to many seminar presentations, Xavier Gabaix, Leonid Kogan, Ben Moll, Stavros Panageas, Gill Segal, David Sraer, and Gabriel Zucman for helpful discussion and comments. †Princeton University; [email protected]