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First-Order Risk Aversion, Heterogeneity, and Asset Market Outcomes

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  • DAVID A. CHAPMAN
  • VALERY POLKOVNICHENKO

Abstract

We examine a wide range of two-date economies populated by heterogeneous agents with the most common forms of nonexpected utility preferences used in finance and macroeconomics. We demonstrate that the risk premium and the risk-free rate in these models are sensitive to ignoring heterogeneity. This follows because of endogenous withdrawal by nonexpected utility agents from the market for the risky asset. This finding is important precisely because these alternative preferences have frequently been proposed as possible resolutions to various asset pricing puzzles, "and" they have all been examined exclusively in a representative agent framework. Copyright (c) 2009 the American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 64 (2009)
Issue (Month): 4 (08)
Pages: 1863-1887

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Handle: RePEc:bla:jfinan:v:64:y:2009:i:4:p:1863-1887

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Cited by:
  1. Barberis, Nicholas & Huang, Ming, 2009. "Preferences with frames: A new utility specification that allows for the framing of risks," Journal of Economic Dynamics and Control, Elsevier, vol. 33(8), pages 1555-1576, August.
  2. Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
  3. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," NBER Working Papers 16181, National Bureau of Economic Research, Inc.
  4. Jayant Ganguli & Scott Condie, 2012. "The pricing effects of ambiguous private information," Economics Discussion Papers 720, University of Essex, Department of Economics.
  5. Matteo Del Vigna, 2011. "Financial market equilibria with heterogeneous agents: CAPM and market segmentation," DiMaD Working Papers 2011-08, Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze.
  6. Martin Schneider, 2010. "The Research Agenda: Martin Schneider on Multiple Priors Preferences and Financial Markets," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 11(2), April.

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