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Heterogeneous Preferences and the Representative Investor

  • Frank Niehaus

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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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2002 with number 152.

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Date of creation: 01 Jul 2002
Date of revision:
Handle: RePEc:sce:scecf2:152
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