Two Investors, Two Trees, Two Goods
153 Pages Posted: 4 Aug 2021 Last revised: 1 Sep 2022
Date Written: August 31, 2022
Abstract
I characterize the global solution to the portfolio problem of two heterogeneous investors with general preferences, in a two-tree, two-good environment. Investors have recursive preferences and a bias in consumption towards a preferred good. The framework highlights the role of the allocation of wealth across investors for portfolios, asset prices, and risk sharing, an aspect that had received little emphasis in such a setting. The influence of the allocation of wealth grows especially as markets become imperfectly integrated, and as investor heterogeneity rises -- be it through a larger bias in consumption, the introduction of labor income, or asymmetries in preferences -- to the point where it can match or surpass the impact of fundamentals. The framework lends itself to several applications and extensions, e.g. in international or environmental contexts.
Keywords: Portfolio Choice, Asset Pricing, Wealth Allocation, Heterogeneous Investors, International Financial System, Environmental Finance
JEL Classification: E0, F3, F4, G1, Q5
Suggested Citation: Suggested Citation