Survival and long-run dynamics with heterogeneous beliefs under recursive preferences
AbstractI study the long-run behavior of a two-agent economy where agents differ in their beliefs and are endowed with homothetic recursive preferences of the Duffie-Epstein-Zin type. When preferences are separable, the economy is dominated in the long run by the agent whose beliefs are relatively more precise, a result consistent with the market selection hypothesis. However, recursive preference specifications lead to equilibria in which both agents survive, or to ones where either agent can dominate the economy with a strictly positive probability. In this respect, the market selection hypothesis is not robust to deviations from separability. I derive analytical conditions for the existence of nondegenerate long-run equilibria, and show that these equilibria exist for plausible parameterizations when risk aversion is larger than the inverse of the intertemporal elasticity of substitution, providing a justification for models that combine belief heterogeneity and recursive preferences.
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 Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2011-06.
Date of creation: 2011
Date of revision:
Contact details of provider:
Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834
Web page: http://www.chicagofed.org/
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-05 (All new papers)
- NEP-CBA-2011-12-05 (Central Banking)
- NEP-DGE-2011-12-05 (Dynamic General Equilibrium)
- NEP-EVO-2011-12-05 (Evolutionary Economics)
- NEP-HPE-2011-12-05 (History & Philosophy of Economics)
- NEP-MIC-2011-12-05 (Microeconomics)
- NEP-UPT-2011-12-05 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Clotilde Napp & Elyès Jouini, 2007.
"Consensus consumer and intertemporal asset pricing with heterogeneous beliefs,"
- Ely�s Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1149-1174.
- Elyès Jouini & Clotilde Napp, 2003. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Finance 0312001, EconWPA.
- Hui Chen & Scott Joslin & Ngoc-Khanh Tran, 2012.
"Rare Disasters and Risk Sharing with Heterogeneous Beliefs,"
Review of Financial Studies,
Society for Financial Studies, vol. 25(7), pages 2189-2224.
- Hui Chen & Scott Joslin & Ngoc-Khanh Tran, 2010. "Rare Disasters and Risk Sharing with Heterogeneous Beliefs," NBER Working Papers 16035, National Bureau of Economic Research, Inc.
- Hongjun Yan, 2008.
"Natural Selection in Financial Markets: Does it Work?,"
Yale School of Management Working Papers
amz2648, Yale School of Management, revised 01 May 2008.
- Hongjun Yan, 2008. "Natural Selection in Financial Markets: Does It Work?," Management Science, INFORMS, vol. 54(11), pages 1935-1950, November.
- Epstein, Larry G. & Miao, Jianjun, 2003.
"A two-person dynamic equilibrium under ambiguity,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 27(7), pages 1253-1288, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores).
If references are entirely missing, you can add them using this form.