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A Heterogeneous-Agent Foundation of the Representative-Agent Approach

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  • Sabine Elmiger

    (University of Zurich and Swiss Finance Institute)

Abstract

The representative-agent approach is widely used in consumption-based asset pricing. From a theoretical point of view, quite restrictive assumptions on the underlying economy are needed for asset prices to depend only on aggregate consumption. A heterogeneous-agent financial market model is presented with all investors following simple rebalancing rules where aggregation already fails. A meaningful specification of a representative agent is still possible: Instead of asset prices per se the representative agent indicates the direction in which relative asset prices tend to in expectation from one time period to the next. The objective function of the representative agent is independent of the set of rebalancing rules participating in the market.

Suggested Citation

  • Sabine Elmiger, 2016. "A Heterogeneous-Agent Foundation of the Representative-Agent Approach," Swiss Finance Institute Research Paper Series 16-58, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1658
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