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Asset Prices with Heterogeneity in Preferences and Beliefs


Harjoat Singh Bhamra


University of British Columbia (UBC) - Sauder School of Business

Raman Uppal


EDHEC Business School; Centre for Economic Policy Research (CEPR)

February 2013

AFA 2010 Atlanta Meetings Paper

Abstract:     
In this paper, we study asset prices in a dynamic, continuous-time, general-equilibrium endowment economy where agents have “catching up with the Joneses” utility functions and differ with respect to their beliefs (because of differences in priors) and their preference parameters for time discount, risk aversion, and sensitivity to habit. A key contribution of our paper is to demonstrate how one can obtain a closed-form solution to the consumption-sharing rule for agents who have both heterogeneous priors and heterogeneous preferences without restricting the risk aversion of the two agents to special values. We solve in closed form also for the the state-price density, the riskless interest rate and market price of risk; the stock price, equity risk premium, and volatility of stock returns; the term structure of interest rates; and the conditions necessary to obtain a stationary equilibrium in which both agents survive in the long run. The methodology we develop is sufficiently general that, as long as markets are complete, it can be used to obtain the sharing rule and state prices for models set in discrete or continuous time and for arbitrary endowment and belief updating processes.

Number of Pages in PDF File: 76

Keywords: heterogeneity, general equilibrium, stationarity, equity risk premium, volatility

JEL Classification: D51, G12

working papers series


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Date posted: March 19, 2009 ; Last revised: May 8, 2013

Suggested Citation

Bhamra, Harjoat Singh and Uppal , Raman, Asset Prices with Heterogeneity in Preferences and Beliefs (February 2013). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1365032 or http://dx.doi.org/10.2139/ssrn.1365032

Contact Information

Harjoat Singh Bhamra (Contact Author)
University of British Columbia (UBC) - Sauder School of Business ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
Raman Uppal
EDHEC Business School ( email )
10 Fleet Place, Ludgate
London, EC4M 7RB
United Kingdom
+44 20 7871 6744 (Phone)
90-98 Goswell Road
London, EC1V 7RR
United Kingdom
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