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Heterogeneous Preferences and the Representative Investor

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  • Frank Niehaus

Abstract

In this paper, I examine an inter-temporal exchange economy with a complete financial market. The economy is populated by two heterogeneous investors who differ from each other in their attitudes towards risk. In such a model, a single representative agent can be created who generates the same asset prices as those generated by the heterogeneous agents. I analyze the relationship between the preferences of the heterogeneous agents and the preference of the corresponding representative agent and find that the less risk averse agent influences the prices of the contingent claims more than the more risk averse one - even if the more risk averse agent holds most of the contingent consumption in one state of nature.
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Suggested Citation

  • Frank Niehaus, 2002. "Heterogeneous Preferences and the Representative Investor," Computing in Economics and Finance 2002 152, Society for Computational Economics.
  • Handle: RePEc:sce:scecf2:152
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    Keywords

    asset pricing; heterogeneous agents;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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