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Endogenous Aggregate Beliefs: Equity Trading under Heterogeneity in Ambiguity Aversion

Author

Listed:
  • Irasema Alonso

    (Columbia University. New York. USA.)

  • Mauricio Prado

    (Copenhagen Business School. Copenhagen. Denmark.)

Abstract

We build a simple and tractable model of consumer heterogeneity in ambiguity aversion and use it to illustrate how asymmetric beliefs in the asset markets affect the dynamics of asset pricing, portfolio allocation, and the wealth distribution. The model is an otherwise canonical exchange-economy setting with two aggregate states of nature and two assets. The key focus is on how asset prices, when subjected to ambiguity, behave very differently in the short run than in the long run. In the short run, heterogeneity plays an important role. In the long run, belief heterogeneity persists, but the wealth distribution has evolved so that only the least ambiguity-averse investors matter for prices. As part of the short-run dynamics, the model can generate endogenous aggregate movements in non-participation—a drastic form of trading less—in response to ambiguity, with strong depressing effects on asset prices.

Suggested Citation

  • Irasema Alonso & Mauricio Prado, 2024. "Endogenous Aggregate Beliefs: Equity Trading under Heterogeneity in Ambiguity Aversion," Revista de Economía y Finanzas (REyF), Asociación Cuadernos de Economía, vol. 2(4), pages 45-60, Abril.
    • Handle: RePEc:cud:journ2:v:2:y:2024:i:4:p:45-60
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    More about this item

    Keywords

    Ambiguity aversion; Agent heterogeneity; Asset pricing; Portfolio choice; Wealth distribution;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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