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Financial Markets Equilibrium with Heterogeneous Agents

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

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. We study the impact of investors heterogeneity on the properties of the equilibrium. In particular, we analyze the consumption shares, the market price of risk, the risk free rate, the bond prices at dierent maturities, the stock price and volatility as well as the stock's cumulative returns, and optimal portfolio strategies. We relate the heterogeneous economy with the family of associated homogeneous economies with only one class of investors. We consider cross sectional as well as asymptotic properties.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/4724.

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Date of creation: 2012
Date of revision:
Publication status: Published in Review of Finance, 2012, Vol. 16, no. 1. pp. 285-321.Length: 36 pages
Handle: RePEc:dau:papers:123456789/4724

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Related research

Keywords: equilibrium; heterogeneous agents; volatility; optimal portfolios; survival; yield curve; long yield;

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References

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  1. Jiang, Wang, 1996. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(1), pages 75-110, May.
  2. Tony Berrada, 2009. "Bounded Rationality and Asset Pricing with Intermediate Consumption," Review of Finance, European Finance Association, European Finance Association, vol. 13(4), pages 693-725.
  3. Clotilde Napp & Elyès Jouini, 2007. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Post-Print, HAL halshs-00152348, HAL.
  4. Riedel, Frank, 2001. "Existence of Arrow-Radner Equilibrium with Endogenously Complete Markets under Incomplete Information," Journal of Economic Theory, Elsevier, Elsevier, vol. 97(1), pages 109-122, March.
  5. Bhamra, Harjoat Singh & Uppal, Raman, 2013. "Asset Prices with Heterogeneity in Preferences and Beliefs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9459, C.E.P.R. Discussion Papers.
  6. Kogan, Leonid & Ross, Stephen & Wang, Jiang & Westerfield, Mark, 2003. "The Price Impact and Survival of Irrational Traders," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 4293-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Jaksa CVITANIC & Semyon MALAMUD, . "Equilibrium Driven by Discounted Dividend Volatility," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 09-34, Swiss Finance Institute.
  8. Mele, Antonio, 2007. "Asymmetric stock market volatility and the cyclical behavior of expected returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 86(2), pages 446-478, November.
  9. Elyès Jouini & Jean-Michel Marin & Clotilde Napp, 2010. "Discounting and Divergence of Opinion," Post-Print, HAL halshs-00176636, HAL.
  10. Cvitanic Jaksa & Malamud Semyon, 2010. "Relative Extinction of Heterogeneous Agents," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 10(1), pages 1-23, February.
  11. Berrada, Tony & Hugonnier, Julien & Rindisbacher, Marcel, 2007. "Heterogeneous preferences and equilibrium trading volume," Journal of Financial Economics, Elsevier, Elsevier, vol. 83(3), pages 719-750, March.
  12. Duffie, J Darrell & Huang, Chi-fu, 1985. "Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-lived Securities," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1337-56, November.
  13. Detemple, Jerome & Murthy, Shashidhar, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 10(4), pages 1133-74.
  14. Dumas, Bernard, 1989. "Two-Person Dynamic Equilibrium in the Capital Market," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 2(2), pages 157-88.
  15. Markus K. Brunnermeier & Stefan Nagel, 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals," American Economic Review, American Economic Association, American Economic Association, vol. 98(3), pages 713-36, June.
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Citations

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

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