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Financial Markets Equilibrium with Heterogeneous Agents

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  • Jaksa Cvitanic
  • Elyès Jouini
  • Semyon Malamud
  • Clotilde Napp

Abstract

This paper presents an equilibrium model in a pure exchange economy when investors have three possible sources of heterogeneity. Investors may differ in their beliefs, in their level of risk aversion, and in their time preference rate. The authors study the impact of investors' heterogeneity on equilibrium properties and, in particular, on the consumption shares, the market price of risk, the risk-free rate, the bond prices at different maturities, the stock price and volatility as well as on the stock's cumulative returns, and optimal portfolio strategies. The authors relate the heterogeneous economy with the family of associated homogeneous economies with only one class of investors. Cross-sectional as well as long-run properties are analyzed. Copyright 2011, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 16 (2011)
Issue (Month): 1 ()
Pages: 285-321

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Handle: RePEc:oup:revfin:v:16:y:2011:i:1:p:285-321

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References

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  1. Kogan, Leonid & Ross, Stephen & Wang, Jiang & Westerfield, Mark, 2003. "The Price Impact and Survival of Irrational Traders," Working papers 4293-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Jouini, Elyès & Marin, Jean-Michel & Napp, Clotilde, 2010. "Discounting and divergence of opinion," Journal of Economic Theory, Elsevier, vol. 145(2), pages 830-859, March.
  3. Berrada, Tony & Hugonnier, Julien & Rindisbacher, Marcel, 2007. "Heterogeneous preferences and equilibrium trading volume," Journal of Financial Economics, Elsevier, vol. 83(3), pages 719-750, March.
  4. Ely�s Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1149-1174.
  5. Cvitanic Jaksa & Malamud Semyon, 2010. "Relative Extinction of Heterogeneous Agents," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-23, February.
  6. Riedel, Frank, 2001. "Existence of Arrow-Radner Equilibrium with Endogenously Complete Markets under Incomplete Information," Journal of Economic Theory, Elsevier, vol. 97(1), pages 109-122, March.
  7. Jiang, Wang, 1996. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Journal of Financial Economics, Elsevier, vol. 41(1), pages 75-110, May.
  8. Duffie, J Darrell & Huang, Chi-fu, 1985. "Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-lived Securities," Econometrica, Econometric Society, vol. 53(6), pages 1337-56, November.
  9. Mele, Antonio, 2007. "Asymmetric stock market volatility and the cyclical behavior of expected returns," Journal of Financial Economics, Elsevier, vol. 86(2), pages 446-478, November.
  10. Detemple, Jerome & Murthy, Shashidhar, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1133-74.
  11. Markus K. Brunnermeier & Stefan Nagel, 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals," American Economic Review, American Economic Association, vol. 98(3), pages 713-36, June.
  12. Tony Berrada, 2009. "Bounded Rationality and Asset Pricing with Intermediate Consumption," Review of Finance, European Finance Association, vol. 13(4), pages 693-725.
  13. Jaksa CVITANIC & Semyon MALAMUD, . "Equilibrium Driven by Discounted Dividend Volatility," Swiss Finance Institute Research Paper Series 09-34, Swiss Finance Institute.
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Citations

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Cited by:
  1. Georgy Chabakauri, 2010. "Asset pricing with heterogeneous investors and portfolio constraints," LSE Research Online Documents on Economics 43142, London School of Economics and Political Science, LSE Library.
  2. Michail Anthropelos, 2012. "Agents' Strategic Behavior in Optimal Risk Sharing," Papers 1206.0384, arXiv.org, revised Mar 2013.
  3. Jouini, Elyès & Napp, Clotilde, 2014. "How to aggregate experts' discount rates: An equilibrium approach," Economic Modelling, Elsevier, vol. 36(C), pages 235-243.
  4. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," 2012 Meeting Papers 636, Society for Economic Dynamics.
  5. Agostino Capponi & Martin Larsson, 2011. "Default and Systemic Risk in Equilibrium," Papers 1108.1133, arXiv.org, revised Dec 2011.
  6. Martin Larsson, 2013. "Non-Equivalent Beliefs and Subjective Equilibrium Bubbles," Papers 1306.5082, arXiv.org.
  7. Pierre-Olivier Gourinchas & Helene Rey & Nicolas Govillot, 2010. "Exorbitant Privilege and Exorbitant Duty," IMES Discussion Paper Series 10-E-20, Institute for Monetary and Economic Studies, Bank of Japan.

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