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Financial Markets Equilibrium with Heterogeneous Agents

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Author Info

  • Jaksa Cvitanic

    (Division of the humanities and social sciences - California Institute of Technology)

  • Elyès Jouini

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine)

  • Semyon Malamud

    (Swiss Finance Institute [Geneva] - Swiss Finance Institute)

  • Clotilde Napp

    (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)

Abstract

This paper presents an equilibrium model in a pure exchange economy when investors have three possible sources of heterogeneity. Investors may dier 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 HAL in its series Post-Print with number halshs-00488537.

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Date of creation: 02 Jan 2012
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Publication status: Published, Review of Finance, 2012, 16, 1, 285-321
Handle: RePEc:hal:journl:halshs-00488537

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

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  1. Berrada, Tony & Hugonnier, Julien & Rindisbacher, Marcel, 2007. "Heterogeneous preferences and equilibrium trading volume," Journal of Financial Economics, Elsevier, vol. 83(3), pages 719-750, March.
  2. Leonid Kogan & Stephen Ross & Jiang Wang & Mark Westerfield, 2003. "The Price Impact and Survival of Irrational Traders," NBER Working Papers 9434, National Bureau of Economic Research, Inc.
  3. Cvitanic Jaksa & Malamud Semyon, 2010. "Relative Extinction of Heterogeneous Agents," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-23, February.
  4. Dumas, Bernard, 1989. "Two-Person Dynamic Equilibrium in the Capital Market," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 157-88.
  5. 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.
  6. Duffie, J Darrell & Huang, Chi-fu, 1985. "Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-lived Securities," Econometrica, Econometric Society, vol. 53(6), pages 1337-56, November.
  7. Clotilde Napp & Elyès Jouini, 2007. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Post-Print halshs-00152348, HAL.
  8. Raman Uppal & Harjoat Bhamra, 2013. "Asset Prices with Heterogeneity in Preferences and Beliefs," 2013 Meeting Papers 1344, Society for Economic Dynamics.
  9. Riedel, Frank, 2001. "Existence of Arrow-Radner Equilibrium with Endogenously Complete Markets under Incomplete Information," Journal of Economic Theory, Elsevier, vol. 97(1), pages 109-122, March.
  10. Jouini, Elyès & Marin, Jean-Michel & Napp, Clotilde, 2010. "Discounting and divergence of opinion," Journal of Economic Theory, Elsevier, vol. 145(2), pages 830-859, March.
  11. Mele, Antonio, 2007. "Asymmetric stock market volatility and the cyclical behavior of expected returns," Journal of Financial Economics, Elsevier, vol. 86(2), pages 446-478, November.
  12. Tony Berrada, 2009. "Bounded Rationality and Asset Pricing with Intermediate Consumption," Review of Finance, European Finance Association, vol. 13(4), pages 693-725.
  13. Jaksa CVITANIC & Semyon MALAMUD, . "Equilibrium Driven by Discounted Dividend Volatility," Swiss Finance Institute Research Paper Series 09-34, Swiss Finance Institute.
  14. Markus K. Brunnermeier & Stefan Nagel, 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals," American Economic Review, American Economic Association, vol. 98(3), pages 713-36, June.
  15. Detemple, Jerome & Murthy, Shashidhar, 1997. "Equilibrium Asset Prices and No-Arbitrage with Portfolio Constraints," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1133-74.
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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 636, Society for Economic Dynamics.
  2. Martin Larsson, 2013. "Non-Equivalent Beliefs and Subjective Equilibrium Bubbles," Papers 1306.5082, arXiv.org.
  3. Georgy Chabakauri, 2010. "Asset pricing with heterogeneous investors and portfolio constraints," LSE Research Online Documents on Economics 43142, London School of Economics and Political Science, LSE Library.
  4. Jouini, Elyès & Napp, Clotilde, 2014. "How to aggregate experts' discount rates: An equilibrium approach," Economic Modelling, Elsevier, vol. 36(C), pages 235-243.
  5. Agostino Capponi & Martin Larsson, 2011. "Default and Systemic Risk in Equilibrium," Papers 1108.1133, arXiv.org, revised Dec 2011.
  6. Michail Anthropelos, 2012. "Agents' Strategic Behavior in Optimal Risk Sharing," Papers 1206.0384, arXiv.org, revised Mar 2013.
  7. 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.

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