The Representative Agent of an Economy with External Habit-Formation and Heterogeneous Risk-Aversion

The Review of Financial Studies, August 2010.

45 Pages Posted: 18 Mar 2008 Last revised: 10 Jan 2018

See all articles by Costas Xiouros

Costas Xiouros

BI Norwegian Business School

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: August 18, 2009

Abstract

For the first time in the literature, we derive an analytic expression for the representative agent of a fairly general class of economies populated by agents with catching up with the Joneses preferences, but with heterogeneous risk-aversion. As Chan and Kogan (2002) show numerically, the representative agent has stochastic risk-aversion that moves counter-cyclically with the state variable. However, we show that the heterogeneity of risk-aversion is unlikely to be able to explain the empirical regularities - namely the variability of the Sharpe ratio - that Campbell and Cochrane (1999) explain in a model of a representative agent with stochastic risk-aversion.

Keywords: Heterogeneous preferences, general equilibrium, closed-form expression

JEL Classification: D5, E1, G12

Suggested Citation

Xiouros, Costas and Zapatero, Fernando, The Representative Agent of an Economy with External Habit-Formation and Heterogeneous Risk-Aversion (August 18, 2009). The Review of Financial Studies, August 2010., Available at SSRN: https://ssrn.com/abstract=1107495 or http://dx.doi.org/10.2139/ssrn.1107495

Costas Xiouros (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
286
Abstract Views
1,234
rank
117,815
PlumX Metrics