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Heterogeniety and limited stock market Participation

  • Aase, Knut K.

    ()

    (Dept. of Business and Management Science, Norwegian School of Economics)

We derive the equilibrium interest rate and risk premiums using recursive utility with heterogeneity in a continuous time model. Two ordinally equivalent versions are considered, each associated with a different set of risk premiums and interest rate. The first version has consumption history dependent marginal utility and is homogeneous of degree one in consumption, the second version is homothetic. When solving the resulting sup-convolution problem, this gives non-trivial results. A heterogeneous two-agent model is calibrated to the data of Mehra and Prescott (1985) assuming the market portfolio is not a proxy of the wealth portfolio. This results in stable and plausible values for the preference parameters of the two agents.

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File URL: http://hdl.handle.net/11250/194964
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2014/5.

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Length: 36 pages
Date of creation: 28 Feb 2014
Date of revision:
Handle: RePEc:hhs:nhhfms:2014_005
Contact details of provider: Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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