Asset Pricing Under Keeping Up With the Joneses and Heterogeneous Beliefs
When agents agree to disagree about the expected growth rate of the aggregate endowment process, we study the asset price dynamics under "Keeping up with the Joneses" (KUJ) meaning that each agent maximizes the expected life-time CRRA utility of his relative consumption to the other agent in the economy. By solving the optimal consumption policies analytically, we obtain the market equilibrium under heterogeneous beliefs. We provide conditions for agents' long-run survival and show that the market price of risk, risk-free rate, price-dividend ratio in market equilibrium are the consumption share weighted averages of these variables under each agent's belief. We also show the cyclical behaviour of Sharpe ratio, risk-free rate, price and dividend ratio and stock volatility. Through Monte Carlo simulations, we find that, when the less risk averse agent is relatively optimistic, allowing a small amount of disagreement between agents can explain many market characterizes including excess volatility, a high equity premium and a low risk-free rate identified in financial markets.
|Date of creation:||01 Mar 2012|
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- Harrison Hong & Jeremy C. Stein, 2007.
"Disagreement and the Stock Market,"
Journal of Economic Perspectives,
American Economic Association, vol. 21(2), pages 109-128, Spring.
- Hong, Harrison & Stein, Jeremy, 2007. "Disagreement and the Stock Market," Scholarly Articles 2894690, Harvard University Department of Economics.
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- Elyès Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1149-1174.
- Elyès Jouini & Clotilde Napp, 2003. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Finance 0312001, EconWPA.
- Clotilde Napp & Elyès Jouini, 2007. "Consensus consumer and intertemporal asset pricing with heterogeneous beliefs," Post-Print halshs-00152348, HAL.
- John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
- Campbell, John & Cochrane, John H., 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
- John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
- John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Andrea Buraschi & Alexei Jiltsov, 2006. "Model Uncertainty and Option Markets with Heterogeneous Beliefs," Journal of Finance, American Finance Association, vol. 61(6), pages 2841-2897, December.
- Masahiro Watanabe, 2008. "Price Volatility and Investor Behavior in an Overlapping Generations Model with Information Asymmetry," Journal of Finance, American Finance Association, vol. 63(1), pages 229-272, 02.
- Elyès Jouini & Clotilde Napp, 2010. "Unbiased Disagreement in Financial Markets, Waves of Pessimism and the Risk-Return Trade-off," Review of Finance, European Finance Association, vol. 15(3), pages 575-601.
- Elyès Jouini & Clotilde Napp, 2010. "Unbiased Disagreement in financial markets, waves of pessimism and the risk return tradeoff," Post-Print halshs-00488481, HAL.
- Giordani, Paolo & Soderlind, Paul, 2006. "Is there evidence of pessimism and doubt in subjective distributions? Implications for the equity premium puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 30(6), pages 1027-1043, June.
- Clotilde Napp & Elyès Jouini, 2006. "Heterogeneous Beliefs and Asset Pricing in Discrete Time," Post-Print halshs-00151536, HAL.
- repec:dau:papers:123456789/341 is not listed on IDEAS
- repec:dau:papers:123456789/78 is not listed on IDEAS
- Costas Xiouros & Fernando Zapatero, 2010. "The Representative Agent of an Economy with External Habit Formation and Heterogeneous Risk Aversion," Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3017-3047, August. Full references (including those not matched with items on IDEAS)
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