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Asset Pricing with Heterogeneous Investors and Portfolio Constraints

Georgy Chabakauri

London School of Economics and Political Science

April 1, 2013

We study dynamic general equilibrium in a Lucas economies with one consumption good and two CRRA investors with heterogeneous risk aversions and beliefs about aggregate consumption growth rate, and portfolio constraints. We provide a tractable characterization of equilibrium without relying on the assumption of logarithmic constrained investors, popular in the literature, under which wealth-consumption ratios of these investors are unaffected by constraints. We explore the impact of borrowing, short-sale, and limited stock market participation constraints on market prices of risk, interest rates, stock return volatilities and price-dividend ratios. We demonstrate conditions under which constraints increase or decrease these equilibrium processes, and generate dynamic patterns consistent with empirical findings.

Number of Pages in PDF File: 36

Keywords: asset pricing, dynamic equilibrium, heterogeneous investors, borrowing constraints, short-sale constraints, limited participation constraints, stock return volatility

JEL Classification: D52, G12

working papers series

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Date posted: March 18, 2010 ; Last revised: May 6, 2013

Suggested Citation

Chabakauri, Georgy, Asset Pricing with Heterogeneous Investors and Portfolio Constraints (April 1, 2013). Available at SSRN: http://ssrn.com/abstract=1571526 or http://dx.doi.org/10.2139/ssrn.1571526

Contact Information

Georgy Chabakauri (Contact Author)
London School of Economics and Political Science ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
HOME PAGE: http://personal.lse.ac.uk/CHABAKAU/
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References:  70
Citations:  4
Footnotes:  15

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