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The Importance Of The Number Of Different Agents In A Heterogeneous Asset-Pricing Model

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  • Wouter J. Denhaan

    (UCSD)

Abstract

In this paper, I compare a two-agent asset-pricing model with the corresponding model with a continuum of agents. In a two-agent economy, interest rates respond to idiosyncratic income shocks because each agent represents half of the population. These interest rate effects facilitate consumption smoothing. An agent in a two-agent economy, however, can never lend more than the other agent is allowed to borrow, which prevents him from building a buffer stock of assets. For most parameter values, the first effect is more important. For some parameter values, the interest rate effects in the two-agent economy are so strong that a relaxation of the borrowing constraint reduces an agent's utility.In contrast to these differences, I find that for most parameter values there are no large differences in average interest rates across the two types of economies. In addition, I analyze the business cycle behavior of interest rates in an incomplete markets economy with a continuum of agents. The dynamic response of interest rates to aggregate shocks is a lot more complicated than the response in a complete markets economy and the magnitude of the response is bigger.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 349.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:349

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References

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  1. Albert Marcet & Kenneth J. Singleton, 1990. "Equilibrium asset prices and savings of heterogeneous agents in the presence of incomplete markets and portfolio constraints," Economics Working Papers 319, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 1998.
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Citations

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Cited by:
  1. Fanti, Luciano & Gori, Luca, 2011. "The codetermined firm in a Cournot duopoly: a stability analysis," MPRA Paper 34144, University Library of Munich, Germany.
  2. Brumm, Johannes & Grill, Michael, 2014. "Computing equilibria in dynamic models with occasionally binding constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 142-160.
  3. Finocchiaro, Daria, 2011. "Inattention, wealth inequality and equilibrium asset prices," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 146-155, March.
  4. Felix Kubler & Karl Schmedders, 2001. "Incomplete Markets, Transitory Shocks, and Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 747-766, October.
  5. Luciano Fanti & Luca Gori, 2011. "The dynamics of a differentiated duopoly with quantity competition," Discussion Papers 2011/121, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  6. Fanti, Luciano, 2014. "The dynamics of a banking duopoly with capital regulations," Economic Modelling, Elsevier, vol. 37(C), pages 340-349.
  7. Luciano Fanti, 2012. "The dynamics of a banking duopoly with capital regulations," Discussion Papers 2012/151, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  8. Polkovnichenko, Valery, 2004. "Limited stock market participation and the equity premium," Finance Research Letters, Elsevier, vol. 1(1), pages 24-34, March.
  9. Tomasz Dubiel-Teleszyński, 2010. "Complex Dynamics in a Bertrand Duopoly Game with Heterogeneous Players," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 2(2), pages 95-116, March.
  10. Luciano Fanti, 2012. "Environmental standards and Cournot duopoly: a stability analysis," Discussion Papers 2012/154, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  11. Christensen, Peter Ove & Larsen, Kasper & Munk, Claus, 2012. "Equilibrium in securities markets with heterogeneous investors and unspanned income risk," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1035-1063.
  12. Xin, Baogui & Chen, Tong, 2011. "On a master-slave Bertrand game model," Economic Modelling, Elsevier, vol. 28(4), pages 1864-1870, July.
  13. Santiago Mira-Navarro, 2002. "Equilibria of heterogeneous economies with a continuum of agents," Documentos de trabajo conjunto ULL-ULPGC 2002-08, Facultad de Ciencias Económicas de la ULPGC.

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