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Heterogeneous preferences, investment, and asset pricing

Author

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  • Bo Liu
  • Lei Lu
  • Congming Mu
  • Jinqiang Yang

Abstract

We present a production‐based model in which agents have heterogeneous risk aversion and heterogeneous discount rate. Compared to the exchange economy, the aggregate consumption‐capital ratio and aggregate consumption volatility is reduced. The risk premium and the volatility of stock return increase when moving from the exchange economy to the production economy. We also find that the volatility of Tobin's q exhibits an inverted‐U‐shape and Tobin's q is procyclical.

Suggested Citation

  • Bo Liu & Lei Lu & Congming Mu & Jinqiang Yang, 2021. "Heterogeneous preferences, investment, and asset pricing," Financial Management, Financial Management Association International, vol. 50(4), pages 1169-1193, December.
    • Handle: RePEc:bla:finmgt:v:50:y:2021:i:4:p:1169-1193
    DOI: 10.1111/fima.12350
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    Cited by:

    1. Deshui Yu & Yayi Yan, 2023. "Joint dynamics of stock returns and cash flows: A time‐varying present‐value framework," Financial Management, Financial Management Association International, vol. 52(3), pages 513-541, September.

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