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Asset Prices with Heterogeneity in Preferences and Beliefs

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  • Bhamra, Harjoat Singh
  • Uppal, Raman

Abstract

In this paper, we study asset prices in a dynamic, continuous-time, general-equilibrium endowment economy where agents have “catching up with the Joneses” utility functions and differ with respect to their beliefs (because of differences in priors) and their preference parameters for time discount, risk aversion, and sensitivity to habit. A key contribution of our paper is to demonstrate how one can obtain a closed-form solution to the consumption-sharing rule for agents who have both heterogeneous priors and heterogeneous preferences without restricting the risk aversion of the two agents to special values. We solve in closed form also for the the state-price density, the riskless interest rate and market price of risk; the stock price, equity risk premium, and volatility of stock returns; the term structure of interest rates; and the conditions necessary to obtain a stationary equilibrium in which both agents survive in the long run. The methodology we develop is sufficiently general that, as long as markets are complete, it can be used to obtain the sharing rule and state prices for models set in discrete or continuous time and for arbitrary endowment and belief updating processes.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9459.

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Date of creation: May 2013
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Handle: RePEc:cpr:ceprdp:9459

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Keywords: Asset Pricing; General Equilibrium;

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References

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Citations

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Cited by:
  1. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," FMG Discussion Papers, Financial Markets Group dp707, Financial Markets Group.
  2. Eric Aldrich, 2012. "Trading Volume in General Equilibrium with Complete Markets," 2012 Meeting Papers, Society for Economic Dynamics 36, Society for Economic Dynamics.
  3. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," 2012 Meeting Papers, Society for Economic Dynamics 636, Society for Economic Dynamics.
  4. Zeckhauser, Richard Jay & Tran, Ngoc-Khanh, 2011. "The Behavior of Savings and Asset Prices When Preferences and Beliefs are Heterogeneous," Scholarly Articles 5027955, Harvard Kennedy School of Government.
  5. Eduard Dubin & Olesya V. Grishchenko & Vasily Kartashov, 2012. "Habit formation heterogeneity: Implications for aggregate asset pricing," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2012-07, Board of Governors of the Federal Reserve System (U.S.).
  6. Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2011. "Financial Markets Equilibrium with Heterogeneous Agents," Review of Finance, European Finance Association, European Finance Association, vol. 16(1), pages 285-321.
  7. Xue-Zhong He & Lei Shi, 2012. "Heterogeneous Beliefs and the Cross-Section of Asset Returns," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 303, Quantitative Finance Research Centre, University of Technology, Sydney.
  8. YiLi Chien & Harold L. Cole & Hanno Lustig, 2014. "Implications of Heterogeneity in Preferences, Beliefs and Asset Trading Technologies for the Macroeconomy," NBER Working Papers 20328, National Bureau of Economic Research, Inc.
  9. Jaroslav Borovicka, 2011. "Survival and long-run dynamics with heterogeneous beliefs under recursive preferences," Working Paper Series, Federal Reserve Bank of Chicago WP-2011-06, Federal Reserve Bank of Chicago.

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