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Heterogeneity of Investors and Asset Pricing in a Risk-Value World

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  • Günter Franke

    ()
    (Department of Economics, University of Konstanz)

  • Martin Weber

    ()
    (University of Mannheim)

Abstract

Portfolio choice and the implied asset pricing are usually derived assuming maximization of expected utility. In this Paper, they are derived from risk-value models that generalize the Markowitz-model. We use a behaviourally based risk measure with an endogenous or exogenous benchmark. If the risk measure is modelled by a negative HARA-function, then sharing rules are convex or concave relative to each other. A measure of heterogeneity of investors is derived. More heterogeneity (a) raises convexity/concavity of sharing rules and, thus, the need of investors to trade options, (b) increases convexity of the pricing kernel, (c) raises option prices relative to the price of the under-lying asset and (d) raises the variance and kurtosis of the risk-neutral probability distribution of the aggregate pay-off.

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Bibliographic Info

Paper provided by Center of Finance and Econometrics, University of Konstanz in its series CoFE Discussion Paper with number 01-08.

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Length: 50 pages
Date of creation: 09 Aug 2001
Date of revision:
Handle: RePEc:knz:cofedp:0108

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Keywords: Decision Making Under Risk; Asset Pricing; Convexity of Pricing Kernel; Heterogeneity of Investors;

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Citations

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Cited by:
  1. Lüders, Erik, 2002. "Asset Prices and Alternative Characterizations of the Pricing Kernel," ZEW Discussion Papers 02-10, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Sohnke M. Bartram & Frank R. Fehle, 2003. "Competition among Alternative Option Market Structures: Evidence from Eurex vs. Euwax," Finance 0307005, EconWPA, revised 24 Jul 2003.
  3. Glaser, Markus & Weber, Martin, 2002. "Momentum and Turnover: Evidence from the German Stock Market," CEPR Discussion Papers 3353, C.E.P.R. Discussion Papers.
  4. Sohnke M. Bartram & Frank R. Fehle, 2003. "Alternative Market Structures for Derivatives," Finance 0311007, EconWPA, revised 12 Dec 2003.

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