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A representative agent asset pricing model with heterogeneous beliefs and recursive utility

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  • Suzuki, Masataka

Abstract

In this paper, we consider a continuous-time pure exchange economy with multiple agents whose preferences are represented by a time-inseparable recursive utility. Agents are homogeneous in their preferences, but heterogeneous in their beliefs regarding the drift rate of the aggregate endowment process. Given a competitive equilibrium in this economy, we construct a tractable representative agent model that would approximate asset prices in the original multiple agents economy. We show that our model helps resolve many asset pricing puzzles, such as the equity premium puzzle, equity volatility puzzle, risk-free rate puzzle, and term premium puzzle.

Suggested Citation

  • Suzuki, Masataka, 2016. "A representative agent asset pricing model with heterogeneous beliefs and recursive utility," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 298-315.
    • Handle: RePEc:eee:reveco:v:45:y:2016:i:c:p:298-315
    DOI: 10.1016/j.iref.2016.06.009
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    References listed on IDEAS

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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