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Implications of Heterogeneity in Preferences, Beliefs and Asset Trading Technologies for the Macroeconomy

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  • YiLi Chien
  • Harold L. Cole
  • Hanno Lustig

Abstract

This paper extends the methodology developed in Chien, Cole and Lustig (2011 & 2012) (hereafter CCL2011 and CCL2012, respectively) to analyze and compute the equilibria of economies with heterogeneous agents who have different asset trading technologies and are subject to both aggregate and idiosyncratic income risk. The different asset trading technologies, which are designed to replicate the portfolio behavior seen in the data, fall into two classes. Active traders manage the composition of their portfolios among a given set of assets in addition to choosing how much to save. Passive traders take their portfolio composition as given and choose only how much to save. There can be a wide variety of different cases within each classes. For active traders, the trading technology varies depending on the set of assets that they can use, while for passive traders it varies with the specific portfolio composition rule. In CCL2011 and CCL2012, all of our agents had to have the same CRRA flow utility functions, discount rates, and beliefs. In this extension, this restriction is relaxed greatly extending the set of economies to which our method applies. This richer degree of heterogeneity allows the model to match a number of key features of the data.

Suggested Citation

  • YiLi Chien & Harold L. Cole & Hanno Lustig, 2014. "Implications of Heterogeneity in Preferences, Beliefs and Asset Trading Technologies for the Macroeconomy," NBER Working Papers 20328, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20328
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    References listed on IDEAS

    as
    1. Clements, Michael P. & Hendry, David F., 2006. "Forecasting with Breaks," Handbook of Economic Forecasting, Elsevier.
    2. Kjetil Storesletten & Chris Telmer & Amir Yaron, 2007. "Asset Pricing with Idiosyncratic Risk and Overlapping Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 519-548, October.
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    4. YiLi Chien & Harold Cole & Hanno Lustig, 2012. "Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?," American Economic Review, American Economic Association, vol. 102(6), pages 2859-2896, October.
    5. YiLi Chien & Hanno Lustig, 2010. "The Market Price of Aggregate Risk and the Wealth Distribution," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1596-1650, April.
    6. Jaroslav Borovicka, 2009. "Heterogeneous beliefs under recursive preferences," 2009 Meeting Papers 892, Society for Economic Dynamics.
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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