Abstract

http://ssrn.com/abstract=1793747
 
 

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Consumption Risk, Preference Heterogeneity and Asset Prices


Giuliano Curatola


Goethe University Frankfurt - Faculty of Economics and Business Administration

Roberto Marfè


Swiss Finance Institute; University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

September 1, 2012


Abstract:     
This paper analyses an exchange economy whose agents feature linear external habit and heterogeneous relative risk aversion. Aggregate consumption has stochastic moments in the affine class. Under a realistic pattern of heterogeneity, we derive closed forms for many equilibrium quantities, including the moments of stock returns and the optimal portfolios. We analytically characterize the role of habit, preference heterogeneity and time-varying exogenous uncertainty on the equilibrium price dynamics. These three ingredients help replicating various patterns of both conditional and unconditional moments of returns. Moreover we study the effect of habit and heterogeneity on individual portfolios and the resulting countercyclical trading volume.

An earlier version of this paper was circulated under the title: "Catching up with the Joneses under Preference Heterogeneity: An Exact Solution."

Number of Pages in PDF File: 52

Keywords: equilibrium asset pricing, heterogeneous preferences, external habit, portfolio strategies, closed form expression

JEL Classification: D51, D53, D83, G11, G12

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Date posted: March 28, 2011 ; Last revised: October 4, 2012

Suggested Citation

Curatola, Giuliano and Marfè, Roberto, Consumption Risk, Preference Heterogeneity and Asset Prices (September 1, 2012). Available at SSRN: http://ssrn.com/abstract=1793747 or http://dx.doi.org/10.2139/ssrn.1793747

Contact Information

Giuliano Curatola
Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )
Grueneburgplatz 1
Frankfurt am Main, 60323
Germany
Roberto Marfè (Contact Author)
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )
Lausanne, 1018
Switzerland
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