Equilibrium Driven by Discounted Dividend Volatility
AbstractWe derive representations for the stock price drift and volatility in the equilibrium of agents with arbitrary, heterogeneous utility functions and with the aggregate dividend following an arbitrary Markov diffusion. We introduce a new, intrinsic characteristic of the aggregate dividend process that we call the ”rate of discounting volatility” and show that, in equilibrium, the size of market price of risk is determined by the market price of discounted dividend volatility (DDV), discounted at that rate, and multiplied by the aggregate risk aversion. The stock price volatility is equal to the market price of DDV plus a volatility risk premium. In particular, stock price volatility is larger than the dividend volatility if the aggregate risk aversion is decreasing, dividend volatility is countercylical and the rate of discounting volatility is procyclical. We also obtain a representation for the optimal portfolios. Under the above cyclicality conditions, we show that the non-myopic (hedging) component of an agent’s portfolio is positive (negative) if the product of agent’s prudence and risk tolerance is below (above) two, and the sign is reversed for the reversed cyclicality conditions.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 09-34.
Length: 46 pages
Date of creation:
Date of revision:
equilibrium; heterogeneous agents; volatility; optimal portfolios;
Find related papers by JEL classification:
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2011.
"Financial Markets Equilibrium with Heterogeneous Agents,"
Review of Finance,
European Finance Association, vol. 16(1), pages 285-321.
- Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2012. "Financial Markets Equilibrium with Heterogeneous Agents," Post-Print halshs-00488537, HAL.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.