Financial market equilibria with heterogeneous agents: CAPM and market segmentation
AbstractWe consider a single-period financial market model with normally distributed returns and the presence of heterogeneous agents. Specifically, some investors are classical Expected Utility Maximizers whereas some others follow Cumulative Prospect Theory. Using well-known functional forms for the preferences, we analytically prove that a Security Market Line Theorem holds. This implies that Capital Asset Pricing Model is a necessary (though not sufficient) requirement in equilibria with positive prices. We correct some erroneous results about existence of equilibria with Cumulative Prospect Theory investors which had appeared in the last few years and we give sufficient conditions for an equilibrium to exist. To circumvent the complexity arising from the interaction of heterogeneous agents, we propose a segmented-market equilibrium model where segmentation is endogenously determined.
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Bibliographic InfoPaper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Mathematical Economics with number 2011-08.
Length: 21 pages
Date of creation: Sep 2011
Date of revision:
asset pricing; heterogeneous agents; capital asset pricing model; cumulative prospect theory.;
Find related papers by JEL classification:
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-01 (All new papers)
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