Asset Pricing with Heterogeneous Investors and Portfolio Constraints
We study dynamic general equilibrium in one-tree and two-trees Lucas economies with one consumption good and two CRRA investors with heterogeneous risk aversions and portfolio constraints. We provide a tractable characterization of equilibrium without relying on the assumption of logarithmic constrained investors, popular in the literature, under which wealthconsumption ratios of these investors are unaffected by constraints. In one-tree economy we focus on the impact of limited stock market participation and margin constraints on market prices of risk, interest rates, stock return volatilities and price-dividend ratios. We demonstrate conditions under which constraints increase or decrease these equilibrium processes, and generate dynamic patterns consistent with empirical findings. In a two-trees economy we demonstrate that investor heterogeneity gives rise to large countercyclical excess stock return correlations, but margin constraints significantly reduce them by restricting the leverage in the economy, and give rise to rich saddle-type patterns. We also derive a new closed-form consumption CAPM that captures the impact of constraints on stock risk premia.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fatih Guvenen, 2009.
"A Parsimonious Macroeconomic Model for Asset Pricing,"
NBER Working Papers
15243, National Bureau of Economic Research, Inc.
- Fatih Guvenen, 2009. "A Parsimonious Macroeconomic Model for Asset Pricing," Econometrica, Econometric Society, vol. 77(6), pages 1711-1750, November.
- Fatih Guvenen, 2009. "A parsimonious macroeconomic model for asset pricing," Staff Report 434, Federal Reserve Bank of Minneapolis.
- Gomes, Francisco J & Michaelides, Alexander, 2007.
"Asset Pricing with Limited Risk Sharing and Heterogeneous Agents,"
CEPR Discussion Papers
6136, C.E.P.R. Discussion Papers.
- Francisco Gomes & Alexander Michaelides, 2008. "Asset Pricing with Limited Risk Sharing and Heterogeneous Agents," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 415-448, January.
- Francisco Gomes & Alexander Michaelides, 2005. "Asset pricing with limited risk sharing and heterogeneous agents," LSE Research Online Documents on Economics 24649, London School of Economics and Political Science, LSE Library.
- Jérˆme Detemple & Marcel Rindisbacher, 2005. "Closed-Form Solutions For Optimal Portfolio Selection With Stochastic Interest Rate And Investment Constraints," Mathematical Finance, Wiley Blackwell, vol. 15(4), pages 539-568.
- Hui Chen & Scott Joslin, 2012.
"Generalized Transform Analysis of Affine Processes and Applications in Finance,"
Review of Financial Studies,
Society for Financial Studies, vol. 25(7), pages 2225-2256.
- Hui Chen & Scott Joslin, 2011. "Generalized Transform Analysis of Affine Processes and Applications in Finance," NBER Working Papers 16906, National Bureau of Economic Research, Inc.
- Hugonnier, Julien, 2012. "Rational asset pricing bubbles and portfolio constraints," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2260-2302.
- Joost Driessen & Pascal J. Maenhout & Grigory Vilkov, 2009. "The Price of Correlation Risk: Evidence from Equity Options," Journal of Finance, American Finance Association, vol. 64(3), pages 1377-1406, 06.
- M. Fatih Guvenen, 2002.
"Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective,"
RCER Working Papers
491, University of Rochester - Center for Economic Research (RCER), revised Mar 2003.
- Guvenen, Fatih, 2006. "Reconciling conflicting evidence on the elasticity of intertemporal substitution: A macroeconomic perspective," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1451-1472, October.
- Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics 0507005, EconWPA.
- Jérôme B. Detemple & René Garcia & Marcel Rindisbacher, 2003.
"A Monte Carlo Method for Optimal Portfolios,"
Journal of Finance,
American Finance Association, vol. 58(1), pages 401-446, 02.
- Andrea Buraschi & Paolo Porchia & Fabio Trojani, 2010. "Correlation Risk and Optimal Portfolio Choice," Journal of Finance, American Finance Association, vol. 65(1), pages 393-420, 02.
- Jaksa CVITANIC & Semyon MALAMUD, 2010.
"Price Impact and Portfolio Impact,"
Swiss Finance Institute Research Paper Series
10-26, Swiss Finance Institute.
- Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
- Ian Martin, 2013.
"The Lucas Orchard,"
Econometric Society, vol. 81(1), pages 55-111, 01.
- 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.
- Raman Uppal & Harjoat Bhamra, 2013. "Asset Prices with Heterogeneity in Preferences and Beliefs," 2013 Meeting Papers 1344, Society for Economic Dynamics.
- Bhamra, Harjoat Singh & Uppal, Raman, 2013. "Asset Prices with Heterogeneity in Preferences and Beliefs," CEPR Discussion Papers 9459, C.E.P.R. Discussion Papers.
- Daniele Coen-Pirani, 2000.
"Margin Requirements and Equilibrium Asset Prices,"
GSIA Working Papers
2001-E5, Carnegie Mellon University, Tepper School of Business.
- Hardouvelis, Gikas A & Pericli, Andreas & Theodossiou, Panayiotis, 1997. "The Asymmetric Relation Between Margin Requirements and Stock Market Volatility Across Bull and Bear Markets," CEPR Discussion Papers 1746, C.E.P.R. Discussion Papers.
- Michael Gallmeyer & Burton Hollifield, 2008. "An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy," Review of Finance, European Finance Association, vol. 12(2), pages 323-364.
When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp707. 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: (The FMG Administration)
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.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.