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Young, Old, Conservative, and Bold: The Implications of Heterogeneity and Finite Lives for Asset Pricing

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  • Nicolae Gârleanu
  • Stavros Panageas

Abstract

We study the implications of preference heterogeneity for asset pricing. We use recursive preferences in order to separate heterogeneity in risk aversion from heterogeneity in the intertemporal elasticity of substitution and an overlapping-generations framework to obtain a nondegenerate stationary equilibrium. We solve the model explicitly up to the solutions of ordinary differential equations and highlight the effects of overlapping generations and each dimension of preference heterogeneity on the market price of risk, interest rates, and the volatility of stock returns. We find that separating intertemporal elasticity of substitution and risk aversion heterogeneity can have a substantive impact on the model's (qualitative and quantitative) ability to address some key asset-pricing issues.

Suggested Citation

  • Nicolae Gârleanu & Stavros Panageas, 2015. "Young, Old, Conservative, and Bold: The Implications of Heterogeneity and Finite Lives for Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 123(3), pages 670-685.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/680996
    DOI: 10.1086/680996
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    References listed on IDEAS

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    4. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
    5. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    6. Epstein, Larry G., 1987. "A simple dynamic general equilibrium model," Journal of Economic Theory, Elsevier, vol. 41(1), pages 68-95, February.
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