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A Temporary Equilibrium Model of Asset Pricing

Author

Listed:
  • George Vachadze

    (CERGE-EI)

Abstract

This paper examines a decision-making problem of rational agents with risk averse utilities in the financial market both in statics and in dynamics. In the financial market there are two securities, one risky security and one riskless bond, and a continuum of investors with heterogeneous preferences, endowments, and beliefs. Given that investors' beliefs are described by gamma distribution with different parameters, predictions are made about competitive equilibrium asset prices and the sizes of groups of traders and of their positions in the market. The dynamic extension of the model shows how traders' beliefs can be updated by Bayes' rule. This rational updating determines the next period investors' beliefs and predicts future equilibrium asset prices and the positions of traders in the market.

Suggested Citation

  • George Vachadze, 2001. "A Temporary Equilibrium Model of Asset Pricing," Finance 0012009, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0012009
    Note: Type of Document - Acrobat PDF; pages: 29 ; figures: included
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0012/0012009.pdf
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    More about this item

    Keywords

    Asset pricing; Heterogeneous agents; Portfolio choice;
    All these keywords.

    JEL classification:

    • 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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