Financial Markets Equilibrium with Heterogeneous Agents
53 Pages Posted: 13 Mar 2010
Date Written: February 12, 2010
This paper presents an equilibrium model in a pure exchange economy when investors have three possible sources of heterogeneity. Investors may differ in their beliefs, in their level of risk aversion and in their time preference rate. We study the impact of investors heterogeneity on the properties of the equilibrium. In particular, we analyze the consumption shares, the market price of risk, the risk free rate, the bond prices at different maturities, the stock price and volatility as well as the stockís cumulative returns, and optimal portfolio strategies. We relate the heterogeneous economy with the family of associated homogeneous economies with only one class of investors. We consider cross sectional as well as asymptotic properties.
Keywords: Heterogeneous beliefs, heterogeneous preferences, heterogeneous time preference rates, contracyclical market price of risk, procyclical interest rate, term structure of interest rates, preferred habitat theory, long term risk
JEL Classification: G12, E43, D53
Suggested Citation: Suggested Citation