International Equity Premia and Rates for Interconnected and Heterogeneous Economies
Goethe University Frankfurt, Graduate Program - Finance and Monetary Economics
June 24, 2013
This work studies asset pricing in which the model combines dynamic learning and heterogeneous habit formations with agentsheterogeneous beliefs and preferences in a continuous-time, general-equilibrium, and international endowment economy. The intertemporal and frictionless equilibrium model considers two groups of agents who have heterogeneous expectations about the future economic growth of two/N international goods and incomplete information. Additionally, the agents di¤er in both, with respect to the subjective rate of time preference and in the levels of risk aversions. Further, the agents can have different risk aversions and different external habit formations across goods. The fundamental dynamics of the economies are modeled with interaction across evolutions. The model provides closed-form solutions for all relevant equilibrium quantities. This includes also analytical solutions for asset pricing and asset allocation. With this approach we can perform a qualitative study of agents heterogeneities and their implications on equilibrium co-movements as well as on cross-sectional asset returns within international fi nancial markets. It is shown that the right combination of heterogeneities and learning agents matters and improves the current literature on asset pricing puzzles. The levels of the locally risk-free interest rates, and the interest rates volatilities are close to the empirical findings for reasonable model parameters. The international equity premium can increase with the level of international growth interdependencies and the levels of heterogeneities, and they are also closer to the empirical findings compared to standard models. Further, real exchange rate volatilities are much higher and more persistent compared to the literature and closer to the empirical findings. We developed an international workhorse model, which can explain simultaneously the international interest-rates puzzles, the international equity premium puzzles, the real exchange rate volatility puzzle, and the home bias puzzle, in light of a distinct structural economic analysis.
Number of Pages in PDF File: 135
Keywords: Lucas orchard, heterogeneous beliefs and preferences, learning, habit formation, international equity premium puzzle, risk-free rate puzzle, real exchange rate puzzle
JEL Classification: C60, D50, D80, G11, G12, G13working papers series
Date posted: October 9, 2010 ; Last revised: July 10, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.359 seconds