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Dynamic Wealth Redistribution, Trade, and Asset Pricing

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  • Simon Benninga
  • Joram Mayshar
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    Abstract

    We relate wealth redistribution, asset pricing, and trade in financial assets by introducing heterogeneous agents into a Lucas tree-model. Heterogeneity of agents causes trade in financial assets and dynamic wealth redistribution. When consumers have time-separable, constant elasticity utilities with constant time-discount factors, the price-representative consumer has declining temporal relative risk aversion and intertemporal discount factors. Resulting asset prices "over-react": Adverse aggregate consumption shocks cause wealth redistribution towards more risk averse consumers, reinforcing the adverse market value effect. Interest rates, risk premia, return volatility, and trade volume exhibit time-variance.

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    Bibliographic Info

    Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 8-93.

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    Handle: RePEc:fth:pennfi:8-93

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    Cited by:
    1. Jiang Wang, 1995. "The Term Structure of Interest Rates in a Pure Exchange Economy with Heterogeneous Investors," NBER Working Papers 5172, National Bureau of Economic Research, Inc.
    2. Jiang, Wang, 1996. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Journal of Financial Economics, Elsevier, vol. 41(1), pages 75-110, May.
    3. Wang, Jiang, 1959-, 1995. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Working papers 3839-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.

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