IDEAS home Printed from
   My bibliography  Save this paper

Equilibrium Driven by Discounted Dividend Volatility


  • Jaksa CVITANIC

    (Caltech, Division of Humanities and Social Sciences)

  • Semyon MALAMUD

    (EPF Lausanne and Swiss Finance Institute)


We derive representations for the stock price drift and volatility in the equilibrium of agents with arbitrary, heterogeneous utility functions and with the aggregate dividend following an arbitrary Markov diffusion. We introduce a new, intrinsic characteristic of the aggregate dividend process that we call the ”rate of discounting volatility” and show that, in equilibrium, the size of market price of risk is determined by the market price of discounted dividend volatility (DDV), discounted at that rate, and multiplied by the aggregate risk aversion. The stock price volatility is equal to the market price of DDV plus a volatility risk premium. In particular, stock price volatility is larger than the dividend volatility if the aggregate risk aversion is decreasing, dividend volatility is countercylical and the rate of discounting volatility is procyclical. We also obtain a representation for the optimal portfolios. Under the above cyclicality conditions, we show that the non-myopic (hedging) component of an agent’s portfolio is positive (negative) if the product of agent’s prudence and risk tolerance is below (above) two, and the sign is reversed for the reversed cyclicality conditions.

Suggested Citation

  • Jaksa CVITANIC & Semyon MALAMUD, "undated". "Equilibrium Driven by Discounted Dividend Volatility," Swiss Finance Institute Research Paper Series 09-34, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0934

    Download full text from publisher

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Jaksa Cvitanic & Elyès Jouini & Semyon Malamud & Clotilde Napp, 2011. "Financial Markets Equilibrium with Heterogeneous Agents," Review of Finance, European Finance Association, vol. 16(1), pages 285-321.
    2. Harjoat S. Bhamra & Raman Uppal, 2014. "Asset Prices with Heterogeneity in Preferences and Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 519-580.

    More about this item


    equilibrium; heterogeneous agents; volatility; optimal portfolios;

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp0934. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.