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Live fast, die young: equilibrium and survival in large economies

Author

Listed:
  • Arthur Beddock

    (Université Paris-Dauphine, PSL University
    Tilburg University)

  • Elyès Jouini

    (Université Paris-Dauphine, PSL University)

Abstract

We model a continuous-time economy with a continuum of investors who differ both in belief and time preference rate and analyze the impact of these heterogeneities on the behavior of financial markets. In particular, we allow the two types of heterogeneity to be correlated: a negative correlation means that the most optimistic agents are also the most patient ones. We fully characterize the risk-free rate which is procyclical and the market price of risk which is countercyclical. When the two types of heterogeneity are negatively correlated, the former is higher and the latter lower compared to the standard case. A negative correlation also leads to a higher market volatility. Moreover, we find that the trading volume increases with the variance of the belief heterogeneity distribution. Finally, the surviving agent of this economy is not necessarily the one who maximizes her utility over her lifetime: a shorter life might be more rewarding than a longer one.

Suggested Citation

  • Arthur Beddock & Elyès Jouini, 2021. "Live fast, die young: equilibrium and survival in large economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(3), pages 961-996, April.
    • Handle: RePEc:spr:joecth:v:71:y:2021:i:3:d:10.1007_s00199-020-01268-y
    DOI: 10.1007/s00199-020-01268-y
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    References listed on IDEAS

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    2. Andrea Antico & Giulio Bottazzi & Daniele Giachini, 2022. "On the evolutionary stability of the sentiment investor," LEM Papers Series 2022/09, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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    More about this item

    Keywords

    Heterogeneous beliefs; Heterogeneous time preference rates; Continuum of agents; Asset pricing; Market elimination; Surviving agent;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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