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Asset price volatilities and trading volumes in heterogeneous agent economies

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  • Costas Xiouros

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    (Finance and Business Economics University of Southern California)

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    Abstract

    Apart from the risk premium of equity over bonds, volatility of asset prices and trading volumes are two aspects of the already developed general equilibrium asset pricing theory that fail to show any resemblance with real data. The assumption of agent homogeneity has been relaxed in a number of studies where agents face uninsurable income shocks but fail to provide a consistent explanation that addresses all issues. This study assumes a dynamically complete asset market with two states and two assets, where the agents are allowed to be heterogeneous either in terms of their risk preferences, or in terms of their beliefs for the probabilities of the exogenous shock. The assumption that the (logarithm of the) aggregate dividend follows an autoregressive process with an iid state dependent shock, helps us construct a non-trivial equilibrium in which the endogenously determined wealth distribution across agents is part of the economy's state vector. Qualitative results show that this kind of setup works in the right direction in all issues addressed, while quantitative results are produced using a projection method as well as a variant of the Krusell and Smith method

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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 466.

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    Date of creation: 04 Jul 2006
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    Handle: RePEc:sce:scecfa:466

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    1. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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    8. John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
    9. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity, Portfolio Choice, and Equilibrium Asset Returns," GSIA Working Papers 1997-45, Carnegie Mellon University, Tepper School of Business.
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    16. Andrew B. Abel, . "Asset Prices Under Heterogenous Beliefs: Implications for the Equity Premium," Rodney L. White Center for Financial Research Working Papers 9-89, Wharton School Rodney L. White Center for Financial Research.
    17. 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.
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